Q: I thought about approaching my bank to discuss options but had concerns they might eliminate the unused portion of my Home Equity Line of Credit. Can they do that because I am unemployed?
A: Unfortunately, you don’t necessarily have to be unemployed to have your Home Equity Line of Credit frozen, as many homeowners found out the hard way over the last year or so. According to page 10 of this publication from the Federal Reserve, lenders are allowed to “freeze or reduce a credit line if the value of the home ‘declines significantly’ or, when the lender ‘reasonably believes’ that you will be unable to make your payments due to a ‘material change’ in your financial circumstances.”
While I can’t claim to be an expert on this, it seems pretty clear that being unemployed would qualify as a “material change” in financial circumstances, and that it would be within the bank’s rights to freeze the credit line. So I’d say you are right to be cautious, and that you might want to consider taking steps to secure access to that money now, before raising any potential red flags with your bank, if you want to tap that source.
Keep in mind, as we discussed in Thursday’s session, that borrowing against your home equity puts your home at risk, and the bank is justified in its concern that your new circumstances could jeopardize your ability to pay this loan back. So do explore all your other options for raising cash, and compare the pros and cons in the context of your family’s situation, before making your decision.
For more on consumer rights and the laws governing what lenders can and cannot do with regard to home equity loans and lines of credits, check out this FAQ from the US Department of the Treasury.