Making Cents: Banks can end equity credit lines

John P. Napolitano

Do you have a home equity line of credit? Be careful. I have seen two situations where the owners of the property have received letters from the bank to shut the lines down.

They weren't asking the homeowner to stop drawing on the line; they simply turned off their ability to draw down any more money.

In both situations, the payments on the loans were current and the homeowners were caught by surprise. The reason was because of insufficient equity in the home. The bank often has the right to shut off your line when the value of your home has fallen to a level where the bank believes that the security is not adequate.

How does the bank know if your home equity is sufficient to meet their loan-to-value requirements? In many cases, it is merely a drive-by valuation and a Web site or two. So if the Internet sites that claim to show you the fair market value of your home is way different from your view of fair market value, watch out.

Comparable sales in the neighborhood often influence these sites, and therefore the bank. It doesn't matter if the recent sales in your neighborhood were for run-down houses that haven't been updated in 49 years.

Square footage and lot size seem to drive these Internet valuations often without regard to care and updating that has been done in the home.

Some banks offer you the opportunity to lower your home equity rate, for nothing more than a new application. Be careful here, too, especially if your circumstances have changed and you may not qualify for the loan as you did in the past. This token interest rate reduction is another way that the bank can re-underwrite the loan. In this process, they will again see if you qualify from an income perspective and if the value of the home is what they need it to be.

Your remedies to this shutdown may be limited. You can re-apply to that bank or another bank for another loan or reinstatement of the existing one if you feel that there was a major error in the valuation.

As a preventative measure, re-read your loan documents and see if you are exposed to this possibility. Also get a real handle on the value of your property according to both real estate professionals and the Web sites like those that the banks are using.

John P. Napolitano is the CEO of U.S. Wealth Management in Braintree, Mass. He may be reached at For online discussion and more information, go to