By BankingMyWay Staff
It wasn’t too long ago that banks were eager to let borrowers tap into their home equity through home equity lines of credit (HELOCs). These loans were commonly used for big-ticket expenses like home remodels and college tuition, while some borrowers just enjoyed access to affordable credit in case of an emergency. But as home prices began their precipitous fall and defaults rose, those second mortgages weren’t quite so attractive anymore.

It’s no surprise that lenders are retreating from the second mortgage market. Second mortgages take second billing on home-sale proceeds should a borrower default. That means any outstanding second mortgage loans are only paid if funds are left over after the primary mortgage is paid. With home values falling and foreclosures rising, HELOCs and other second mortgages are too risky for many lenders.

Even those with existing HELOCs are affected. Thousands of homeowners have found themselves unable to renew a line of credit, and some are now finding their lines of credit abruptly frozen or drastically cut. Lenders are cutting HELOCs based on individual home values declining as well as regional trends.

If you are worried about your HELOC, here are some steps you can take to keep it open and available to you.

1. Know your home’s value. If you’re going to make a case to your bank that your HELOC is a safe investment, you’ll need to prove it. Look for comps in your area and talk to real estate professionals to assess the market value of your home. If you’re counting on your HELOC for a major expense like an in-progress remodel, you may want to have a professional appraisal done as well.

2. Know what you owe. Add up how much you owe on your primary and second mortgages, and make sure it’s no more than 90% of your home’s value. The more equity that remains in your home, the more likely lenders will allow you to continue drawing from your HELOC.

3. Check your credit. This is another major reason why HELOCs fail to renew or get frozen. If your credit score has gone down, you’ll be at high risk for losing access to your line of credit. If possible, try to repair your credit score.

4. Improve your debt-to-income ratio. Most lenders do not want your debt-to-income ratio (monthly loan payments/gross monthly income) to exceed 36%. If you have a lot of outstanding debt, look for ways to pay it down or consolidate it so that your monthly payments are lower.

5. Be proactive. If you want until you get a letter from your bank notifying you that your line of credit has been frozen or closed, that may be too late. Contact your lender and make an appointment to discuss your HELOC and make your case to keep it open.

Considering the current lending environment, there may not be anything you can do to prevent your bank from shutting down your HELOC. If you have a large expense on the horizon that you planned to use your HELOC to pay for - such as college tuition bills - you may want to draw down your HELOC now. You’ll have to pay interest on the funds, but you may be able to recoup some of that interest by parking the money in a money market account or money market mutual fund. Just make sure you can make the payments on your HELOC first.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.