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A home equity line of credit (HELOC) is a second mortgage that uses your home’s value to give you a line of credit and access to cash. You borrow an amount against your equity equal to your home’s value minus what’s left on your primary mortgage, typically up to 85% of your equity.
According to the most recent data from the Department of Housing and Urban Development, HELOCs have become more popular in the past four years. There were 1,358,039 HELOC originations in 2022, which is 20% more than in 2018.
But what happens when lenders approve too many big credit lines for borrowers? As they try to reduce their risk exposure, some homeowners are getting a surprise notification that their HELOC has been canceled. Here’s more information on when a bank can cancel your HELOC.
Can a Bank/Lender Cancel My HELOC?
Yes, there are situations when a lender can cancel your HELOC. However, they can’t just drop your HELOC on a whim or for their own benefit. According to Regulation Z of the Truth In Lending Act (TILA), they have to have a legally justifiable reason to do so.
For instance, It’s not acceptable for lenders to rescind credit as part of a general effort to reduce their financial risk. Lenders might be inclined to freeze or cancel all HELOCs in areas where property values are faltering, but that type of sweeping action is illegal.
When a Lender Can Cancel Your HELOC
HELOC modifications and cancellations are most often allowed when the lender has observed one of the following, according to Regulation Z of the Truth in Lending Act:
- Fraud or misrepresentation by the consumer in connection with their HELOC
- Failed payments on an outstanding balance per the HELOC’s repayment terms
- Action or inaction by the consumer that harms the lender’s security in the agreement, such as actions to cause the property value to significantly decrease
When this happens, the line of credit will be terminated and the lender may demand payment in full.
As a borrower, you’re protected by the Truth in Lending Act. As long as you make your HELOC payments according to the repayment plan and you remain in good standing, your lender cannot cancel the HELOC, change the terms, or accelerate your payments.
» MORE: HELOC Pros and Cons
» MORE: See today’s refinance rates
Can I Cancel My HELOC?
Yes, you can cancel your HELOC under the proper conditions. First, you need to make sure you cancel within a three-day window. This is called the “three-day rule” and gives you three business days to cancel your HELOC in writing. The three-day window starts after you sign the loan at closing, the lender gives you a Truth in Lending disclosure form, and the lender gives you two copies of a Truth in Lending notice.
Once you receive all the paperwork and sign the loan at closing, your three-day window begins. Officially, you have until midnight of the third business day (including Saturdays, but not Sundays) to request a HELOC cancellation in writing. You can only cancel if the home is your primary residence, so you can’t cancel a HELOC on secondary or investment properties.
Your written notice of cancellation must be mailed or delivered by the three-day mark, so make sure the mail is certified to prove that you sent it before the end of the third business day.
If you paid for fees when you got your HELOC and still canceled within the three-day window, your lender must pay back all of the fees. This includes appraisal fees, application fees, title fees, and more.
If you miss your window to cancel the HELOC, you’ll need to pay the complete balance down to $0, and you could be subject to prepayment penalties.
Avoiding a HELOC Cancelation or Reduction
Borrowers who are concerned about the status of their HELOCs can take a few steps to ensure their HELOCs aren’t canceled or reduced.
First, you should make sure to make all of your payments on-time according to the payment details of your HELOC agreement.
Second, you should periodically obtain free online home valuation estimates. That estimate could indicate that the home is worth significantly less than it was when the home equity line of credit was approved, and the homeowner might be a target for a HELOC reduction—even if the payments have always been made on time. This can happen when the home’s value decreases since it harms the lender’s security.
Note that lenders that enforce a HELOC reduction aren’t allowed to force the borrower to make a higher payment as a result.