Warning: Frozen HELOCs Ahead

I recently read about a Hollywood Hills homeowner who had a $60,000 home equity line of credit (HELOC) that he was going to use to remodel his kitchen. He had already begun ripping out the cabinets and appliances when he discovered that his bank had frozen access to his HELOC, citing falling home prices in California. Not only was the remodel work delayed until the homeowner found other bank financing, but he was dismayed that the new interest rate was higher than his approved HELOC rate by more than three percentage points.

Thousands of consumers are receiving notice that their HELOCs are being cancelled. According to Bankrate.com, Countrywide, Bank of America, Washington Mutual and IndyMac Bancorp have frozen about 600,000 equity credit lines nationwide since January. Countrywide alone has already suspended an estimated 122,000 lines of credit where homes fell below appraised values; USAA has frozen or reduced 15,000 accounts. Other big lenders, including Chase and Citibank, are doing the same in an effort to quell the rising number of delinquencies on HELOCs. Economy.com pointed to a 47 percent increase in delinquencies on HELOCs as of September 2007, and predicted that the numbers would be even worse in 2008.

Areas of the country where home values have plummeted by 10 percent or more are at greatest risk for HELOC cancellations, especially affecting those who purchased homes in the past few years with little money down. These cities include Los Angeles, Chicago and Las Vegas. Homeowners in Las Vegas are being hit especially hard - it is estimated that 15,000 people (5 percent of the total homeowner population) have had credit lines suspended.

Missed payments or a decrease in credit score can also trigger a HELOC freeze, although homeowners with credit scores in the upper 700s and lower 800s - considered a very good score - are being affected as well.

If you are in the middle of renovations or are counting on having access to the funds for bills, college tuition, or as an emergency account and you think your line of credit may be at risk because you are in a troubled market, you may want to draw a lump sum and put it into a high-yield savings account. While you will be decreasing your equity and will have to begin paying interest, you will guarantee that the money will be there when you need it.

If your HELOC has already been cancelled, you can try to fight it. A realtor or appraiser can help you bolster your case by showing what houses have been selling for in your neighborhood. Be aware of how the tighter lending standards may affect you – in the hardest hit markets, homeowners can only borrow 60 percent of a home's value. If a drop in credit score is the reason for the cancellation, be sure to pull a copy of your credit reports and review them carefully.

Banks may be willing to compromise by giving you a lower credit line rather than cutting off your funds completely. And you can always shop around with other lenders if you have at least 10 percent equity.