Can The Bank Freeze Your HELOC? The Truth About A Home Equity Line of Credit Being Frozen

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I know what you're probably asking yourself is, "Well, I've always heard about home equity lines of credit and the concern that they could be frozen." That is true. A home equity line of credit can be frozen by the bank. Here's how you avoid that. One, we don't advocate a second lien position home equity line of credit. In 2008 and 2009, when you heard those stories of folks having their home equity lines of credit frozen, typically 90 plus percent of the time they were in second lien position, which not only puts the consumer at greater risk, obviously because it was frozen, but also the bank because now the bank is not guaranteed to get their money bank, the first mortgage holder is.
Now here's a little secret. All of you who have a mortgage signed a document at the closing table called a mortgage acceleration clause. I encourage you to get that out and read it. Basically what the mortgage acceleration clause tells you is that the loan company or bank can accelerate your loan due at any time and you have to pay it in full within 60 days, meaning you either pay cash or you refinance, but somehow that bank or lender has to get their money back. That's a mortgage acceleration clause. Not only do you have risk on a home equity line of credit but you have this same risk on a mortgage. Why is it rarely executed? Because they're in first lien position.
In first lien position, the bank gets their money first. The collateral is the home and they don't have to worry about somebody else in a lien position ahead of them getting money before them. That's why we advocate a first lien position home equity line of credit because it lowers your risk. However, it is also the most efficient. Having a home equity line of credit in second lien position and still having a mortgage still segregates income so it's less efficient. Having a home equity line of credit in first lien position not only lowers risk, but it's the most efficient form of real estate finance.