What Happens To Your HELOC If Your Home Value Falls?

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Chris JenningsDeputy Editor, Loans & Mortgages

Chris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a number of outlets, including Yahoo Finance, MSN, Fox Business, and GOBankingRates.

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Chris Jennings

Chris JenningsDeputy Editor, Loans & Mortgages

Deputy Editor, Loans & Mortgages

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Published: Dec 28, 2023, 5:00am

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What Happens To Your HELOC If Your Home Value Falls?

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While home values tend to rise over time, it’s also not a guarantee. If your home’s value falls, your lender may reduce your home equity line of credit (HELOC) borrowing limit. This is because a fluctuating home value affects the amount of equity you possess.

What Are HELOCs and How Do They Work?

A HELOC is a revolving line of credit that uses the equity in your home as collateral. Much like a credit card, a HELOC allows homeowners to access funds as needed up to a predetermined limit. This structure makes HELOCs a flexible borrowing option, particularly for expenses spread over time, such as home improvement projects.

HELOCs function in two distinct phases: the draw period and the repayment period. During the draw period, which typically lasts about 10 years, homeowners can withdraw money as needed and only make interest payments on the amount withdrawn. The repayment period, often 20 years, begins after the draw period ends, during which borrowers must pay back the principal and interest.

Your home equity secures the line of credit, so failure to repay the loan could lead to foreclosure. Therefore, understanding the terms and conditions of a HELOC is vital before taking one out.

How Declining Home Values Affect HELOCs

A decline in home value due to a market downturn can affect the amount of equity you have in your home and, consequently, your access to further funds. This is because the equity in your home—the difference between what you owe on your mortgage and the home’s value—serves as the basis for your HELOC. If your home value dips below the amount you owe on your mortgage, you may find yourself with negative equity.

The financial institution that extended the HELOC has the right to perform a reappraisal of your home during the draw period. If the new appraisal shows a decrease in the home’s value, the HELOC lender may freeze your credit line, preventing you from borrowing additional funds. Alternatively, the lender can reduce the credit limit to match the new equity amount. This could put homeowners relying on the HELOC for significant expenses in a challenging financial position.

A decline in home value could also affect the repayment process. If you decide to sell your house, and the market value is less than what you owe on your mortgage and HELOC, you would have to make up the difference—a potentially substantial sum. This scenario is called being “underwater” and could lead to significant financial complications.

How Would a Housing Market Crash Impact My HELOC?

A housing market crash can severely impact home values and, in turn, your HELOC. In 2008, home prices fell by a record 9.5%, according to data from the National Association of Realtors, resulting in homeowners owing more on their homes than they were worth. Many homeowners found themselves in a tough financial situation, unable to sell or refinance their homes due to negative equity.

If such a scenario occurs again, it could impact your HELOC in several ways. One potential impact is a reduction in the amount of available credit. If the value of your home drops significantly, your lender may decrease your HELOC limit to reflect the reduced equity or freeze your HELOC account altogether.

A housing market crash may also cause you to default on your HELOC if you owe more on your home than it’s worth. This can lead to serious financial consequences, including damage to your credit score and potential legal action from your lender. Furthermore, if you default on your HELOC, your lender has the right to foreclose on your home.

Related: Why Home Equity Matters

How Much Does an Appraisal Cost?

A home appraisal is an essential step in determining your property’s value and the amount you can borrow with a HELOC. The cost of a home appraisal can vary widely but averages about $500 in the United States. Ultimately, the cost of a home appraisal depends on factors such as location, home size and the complexity of the property.

For example, a standard appraisal for a single-family home in a suburban neighborhood might cost around $300. However, if the property is a large, high-value home or is located in a rural area where comparable sales data is more difficult to come by, the cost could be closer to $500.

That said, these prices can shift considerably based on current real estate market conditions and demand for appraisers’ services. In a hot housing market with lots of property sales and refinancing activity, appraisal costs tend to increase. Furthermore, if the appraisal is required for a complex financial transaction like a HELOC or a refinance, the lender may require a more detailed appraisal, resulting in a higher cost.