Lenders are cutting off more home-equity lines of credit, crimping homeowners' plans for honed-stone tiles, copper roofs and other costly improvements.

Peter Ferguson

Borrowing against home equity has been a major source of funds fueling the renovation boom of recent years. But big lenders, including Bank of America, Citibank, Countrywide Financial, Washington Mutual Bank and USAA, collectively have told hundreds of thousands of customers this year that their home-equity lines have been frozen. Lenders typically include language in their agreements that allows them to cap or cut off a credit line if home values decline, or if a borrower fails to make payments on time.

New credit lines also are being limited. A few years ago, people could borrow as much as 100% of their house's value through a credit line and first mortgage; now most are being limited to no more than 65% of the value, according to HSH Associates Financial Publishers in Pompton Plains, N.J. Home-equity borrowing isn't being approved at all in some areas where house prices have fallen sharply, even for people with high credit scores. "It's ugly out there," says Richard Redmond, a mortgage broker in Larkspur, Calif.

WHAT TO DO IF YOUR CREDIT LINE'S FROZEN Falling home prices and the credit crisis are causing lenders to freeze the home equity lines of credit of hundreds of thousands of homeowners. If your HELOC has been cancelled -- or you're worried it might be soon -- try these tips:• Look locally for funding. Major banks that rely on Wall Street backing are most likely to pull equity credit lines, but local banks, thrifts and credit unions may still be offering financing.• Find alternative loan sources. If falling prices have eaten away all of your equity, consider loans against certificates of deposit, securities or your 401k.• Pay for full appraisals. With many markets in free-fall, lenders aren't as willing to rely on automated valuations and drive-by appraisals as they once were.• Be proactive. If you know you'll need cash soon for a renovation, call your lender and ask for written assurance that the money will be available to you. If you don't get it, consider withdrawing the money you'll need and stashing it in an interest-bearing account -- but don't take it all, since maxing out a credit line can hurt your credit score.• Adjust your expectations. Even where home prices haven't taken a hit, in today's market, lenders aren't likely to leverage a home past a 90% combined loan-to-value ratio. So scale back your project, or postpone it if you can.Source: HSH Associates, a publisher of consumer loan information based in Pompton Plains, N.J.

----J.F.

The cutbacks were a shock to Teresa O'Brien, an advertising saleswoman who calls herself "a meticulous bill-payer" with excellent credit. A year ago, she accepted Citibank's mailed offer of a $150,000 line of credit on her 1,800-square-foot condo in Scottsdale, Ariz. She decided to spend about $40,000 of it to redo the bathrooms and floors, put brick on the walls for a "loft-like" look and install stainless-steel appliances. Last month, workers were partway through the project when she wrote a $10,000 check against the credit line and deposited it in her checking account. Then she paid a cabinet subcontractor for work he had completed.

When Ms. O'Brien returned from a weeklong business trip she discovered both checks had bounced. Horrified, she found a letter in her accumulated mail from Citibank discontinuing her credit line. She says she complained repeatedly until Citibank agreed to extend the $10,000 in credit. But that's not enough to finish her job, and she'll have to live with her old carpeting and other unfinished details until she saves enough money to continue the work. "This was a rude awakening," she says.

In Cabot, Pa., Matt Klabnik recently borrowed $18,000 against his retirement account after his lender suspended the home-equity line he was using to help pay for a $75,000, three-car detached garage. National City acted after he forgot to make a $42 minimum payment, and the line wasn't reinstated after he brought the account up to date, he says. "They cut the rug out from under me," says the 39-year-old electrical engineer, who still lacks sufficient funds to finish the garage.

National City's monthly statements to Mr. Klabnik say that "failure to pay minimum payment by due date can cause loss of account privileges." Still, says Keith Gumbinger, a spokesman for HSH Associates, "a lender probably would not have pulled the trigger on a loan for one missed payment two years ago."

Mortgage refinancing, another way to extract home equity, also has become much more difficult. To borrow $65,000 to upgrade his 1950s-era ranch house in Downer's Grove, Ill., Eric Czerwonka tried to refinance late last year. But because home values in his neighborhood were dropping, it took a switch in lenders, seven months, two appraisals and $8,500 in closing costs to secure a new loan -- which in the end allowed him to cash out only $60,000. "It's upsetting," says Mr. Czerwonka, who owns an eBay drop-off store.

Matt Klabnik borrowed $18,000 against his retirement account after his lender suspended the home-equity line he was using to help pay for a $75,000 three-car garage in Cabot, Pa.

All this is dinging the remodeling industry. According to Harvard University's Joint Center for Housing Studies, spending on home remodeling dropped 1.7% in the first quarter, to $175.6 billion, compared with the same quarter of 2007. The center projects that remodeling spending will fall to $165.9 billion in the fourth quarter, down 4.8% from a year earlier.

Robert Rader, owner of Monarch Kitchen & Bath in Orlando, Fla., says that since last year, the amount spent by his clients for an average kitchen-cabinet job has fallen 21% to about $30,000. Customers are going with cheaper woods such as oak, instead of cherry or maple, and are scaling down the size of island counters, he says. Other kitchen spending also is being trimmed: Where clients once opted for $9,000 built-in refrigerators such as Sub-Zeros, they're now choosing $3,000, freestanding Frigidaires. Fancy moldings and trims also are disappearing. "People are dialing it back," he says.

Countrywide froze Bill and Kathryn Keller's $900,000 home-equity credit line at the beginning of this year -- right before contractors were about to start a $450,000 remodeling of their three-bedroom house in Sausalito, Calif. Since they had access to other funds, the couple decided to proceed with the project, which included redoing the master suite and deck. But paying for it put a crimp in their cash flow. Mr. Keller, a portfolio manager, tried to persuade Countrywide to reinstate the line. When that didn't work he applied to refinance his house, but no lender would offer a new mortgage until the remodeling was complete.

"Lenders are looking for any reason not to give you money these days," Mr. Keller says. Months later, when the job was done, he was able to refinance with another lender for $1 million, which was enough to cover the project and pay off the $400,000 he already owed on his Countrywide home-equity line. But he's still annoyed that he had to scramble to get cash he thought would be readily available.

Edward and Jena Toledano were halfway through a $300,000 expansion of the kitchen and family room of their $1.2 million Atlanta house when their lender, E*Trade, yanked their credit line this spring. So the couple sold some stock -- and downgraded their plans. Out went the stainless-steel appliances, $30-a-square-foot honed-stone tiles and copper roof. Instead, they reused their old appliances, ordered $10-a-square-foot tile and installed an asphalt roof.

Mrs. Toledano, a technology-products saleswoman, actually wound up a little happier for the economizing. "In the end, I feel better, because we haven't borrowed as much," she says.

Write to June Fletcher at june.fletcher@wsj.com

Real estate growth impacted due to high interest rates: ICICI

HNIs desert sinking stocks, hitch to realty PMS

Ed McMahon Faces Foreclosure

Lenders Pressed on Bad Loans

Some Buy a New Home to Bail on the Old