Dear Liz: The balance of my mortgage and the limit on my home equity line of credit totaled 80% of my home’s value a year ago. Since then, the home’s value has dropped at least 30%. Can the bank reduce my equity line? If so, by how much? I have high credit scores.
Answer: Yes, your lender typically can reduce your line of credit when your home’s value falls. Since the drop-off in price has been so steep and your “loan to value” was already fairly high, you’re definitely at risk of having the limit reduced. “Loan to value” means the mortgage balance plus the limits on any other home equity loans or lines of credit as a percentage of the home’s current worth. Most lenders these days are wary if loan-to-value exceeds 80%. Some have trimmed limits when loan-to-value ratios exceed 60%.
If you were planning on tapping your line of credit in the near future, do it now while the money is still available. If your line of credit does get trimmed, you could shop around to see whether other lenders would give you more credit, but expect to have some trouble finding one these days that is willing to take a chance.
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