First Card Credit Cards

What is a HELOC?

HELOC stands for Home Equity Line of Credit. A HELOC works similarly to a secured credit card, but instead of depositing money to the lender, your home equity will serve as the security for the loan. If your HELOC application is approved, you’ll be given a credit limit at closing based on the value of your home. You can borrow money within your credit limit as you need it and you’ll pay only what you’ve borrowed so far.

What is a HELOC Freeze?

Now what about a Home Equity Line of Credit freeze? With the misfortune that has happened in the real estate industry recently, lenders are forced to modulate and even freeze some of these HELOCs. In fact, lenders are now even more cautious about issuing HELOCs to home owners than before. Moreover, major banks in North America have already frozen most of their HELOCs.

A frozen HELOC would mean that you cannot borrow further the remainder of the amount that was previously determined as your credit limit minus what you’ve already borrowed. It means that this fund is no longer accessible for you to borrow. This is done by lenders to protect them from the plummeting house value as experienced in today’s slump in the housing market.

Now the real question is how does a frozen HELOC affects home owners? A frozen HELOC means that the holder needs to decide whether he still needs the funds from his HELOC available to him or her. If the borrower knows that she needs the money available to her, she may need to borrow all the available funds now and just pay the interest she’ll incur. In the meantime that she doesn’t use the money, she can put it into some account or short-term investment that earns interest. That may be able to partially offset the interest charge by the lender for the HELOC.

Some banks don’t freeze their HELOCs entirely but instead lower the initial credit limit that they had given to the home owner. In any case, whether the HELOC is frozen or lowered, the home owners should think of ways to make the money available to them when they need it. They might also need to change their spending pattern or postpone some major plans that need substantial amount of money if their HELOCs are frozen or lowered.