Home values in many metro areas are plummeting and HELOC lenders are beginning to worry. Over 100,000 homeowners have received notice that they will no longer be able to withdraw money from their HELOCs.

How can this happen?

Since a HELOC is based on the amount equity in the borrower’s home, most lenders reserve the right to reduce the credit line should the home value decline. During the housing boom home values skyrocketed and borrowers didn’t have to worry about shrinking equity. Now, in a declining real estate market, lenders want to make sure that they do not lend to people who are unable to pay the money back. (See: How to Qualify for a HELOC).

Who does it effect?

According to a recent MSN report, HELOC borrowers with many of the top national lenders have received letters notifying them of changes. In January 122,000 Countrywide customers were notified that they will not be able to withdraw additional money from their HELOCs. Chase, Washington Mutual, and Bank of America are currently reviewing HELOC accounts to make sure credit limits are in line with property values.

How can it be avoided?

If you’re considering taking out a HELOC, it’s not too late. Most lenders are not as lenient with loan terms these days (i.e. they may give borrowers a credit line of 65% of their equity instead of 95%). However, now is a great time to get a low interest rate. The only way to avoid potential credit limit freezes is to take out a loan with terms in the borrower’s favor. Some HELOCs make it very difficult for the lender to freeze or reduce the line. Carefully review all HELOC terms before deciding on a loan. (See: How to Get the Best HELOC Rates and Terms).

Tags | Heloc, heloc freeze, home equity, loans