What Is a HELOC Freeze or Reduction?

Quick Answer

A HELOC freeze or reduction happens when a lender decides to curb a borrower’s ability to tap into their line of credit. A freeze or reduction can be caused by a decline in the value of a home or a change in the borrower’s finances.

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A home equity line of credit (HELOC) is a common way to tap into the value of your home so you can borrow money for home improvements, home repairs, consolidation of credit card debt and other purposes.

A HELOC works like a credit card, giving you access to funds up to a certain credit limit. The amount you can borrow depends in part on how much home equity you have. In the second quarter of 2022, U.S. homeowners had an average of $217,000 in equity available to borrow against while still keeping a 20% equity stake in their home, data provider Black Knight says.

In some cases, though, a HELOC lender might freeze or reduce your borrowing capabilities. After a HELOC freeze or reduction, you'll either be unable to draw funds from your line of credit, or you'll have a smaller credit limit to draw from.

What Does It Mean if My HELOC Is Frozen or Reduced?

So, how would a HELOC freeze or reduction affect you?

When a lender freezes your HELOC, you're prohibited from borrowing additional money. A HELOC reduction is less severe. In this case, a lender decreases the amount of money you can borrow.

Reasons for a HELOC Freeze or Reduction

A lender may freeze or reduce your HELOC borrowing capabilities for a few reasons:

  • The value of your home drops significantly. Even if you've always made on-time HELOC payments, a lender may curb your borrowing capacity if the amount of equity in your home goes down considerably. The National Association of Federally Insured Credit Unions defines a "significant" decrease in a home value as the difference between the initial available equity and the initial credit limit falling by at least 50%, based on a home appraisal.
  • Your financial situation changes. A lender may impose a HELOC freeze or reduction if, for instance, your finances have taken a turn for the worse and the lender questions your ability to make HELOC payments. One way this can happen is if the lender notices a drop in your credit score triggered by financial difficulties due to factors such as a job loss or a divorce.
  • You've stopped making required HELOC payments. A lender can freeze or reduce your HELOC if you've defaulted on it, meaning you've halted payments and violated the lending terms.

What to Do if Your HELOC Is Frozen or Reduced

A lender must notify you in writing no later than three business days after a HELOC freeze or reduction takes effect. So, what options do you have when you receive a freeze or reduction letter?

  • Contact the lender. If you're unclear about why your HELOC was frozen or reduced, reach out to your lender for an explanation.
  • Request cancellation of the freeze or reduction. For instance, if the lender froze your HELOC because your finances took a hit, you could request that the bank reinstate your line of credit once the financial issues that led to a decline in your credit score have been cleared up.
  • Make sure the lender is monitoring your situation. Let's say a dramatic loss of home value caused a HELOC reduction, but the value of your home has since gone up. If so, the lender might automatically restore your full line of credit if it's been tracking your home's value. This wouldn't require you to request reinstatement of your full line of credit.
  • Look for another line of credit. If you're able to qualify for a line of credit from another lender, you might be able to use that money to pay off the original HELOC.
  • Be aware of reinstatement requirements. Your lender may charge you for a new home appraisal or updated credit report when it considers reinstating your HELOC. However, the lender can't hit you with a fee for reinstatement of your HELOC borrowing privileges once the circumstances that led to the freeze or reduction are no longer an issue.
  • Keep making payments. Even though your HELOC has been frozen or reduced, you still should make any payments that you already were making before the lender took action. If you miss a HELOC payment or make a late payment, your credit score could be harmed. That, in turn, may wind up jeopardizing ownership of your home, which serves as collateral for a HELOC.

The Bottom Line

A HELOC freeze or reduction may come as a shock to a homeowner. Fortunately, you can take several steps to reverse a freeze or reduction, such as improving your finances by knocking out some of your debt. To stay on top of your credit, including how much debt you have, be sure to regularly review your free Experian credit report.