A Home Equity Line of Credit (HELOC) is a useful tool to access the equity in your home to get cash. A HELOC is a revolving line of credit that can be used for any purpose such as paying down credit card debt, financing home improvements, or paying off other expenses. However, HELOCs are secured by using your home as collateral. That means if you don't make your monthly payments, your home could be in jeopardy of foreclosure.
HELOCs have an initial draw period where you only pay the interest on what you take out and a repayment phase where you pay the interest plus principal until the line of credit is paid in full. As a result, your monthly payments will increase after the draw phase. And since the interest rate is variable over life of the loan, your payment may also fluctuate during the repayment phase. That can increase your financial risk if you’re not prepared for potential increases in your monthly payment.
Can a lender foreclose on your home if you default on a HELOC?
Failure to make the required payments on a HELOC could result in foreclosure, but that depends on your lender and how much equity you have in your home. If you have more equity in your home, your lender may consider other options to recoup some of the money they are owed. Another reason why a lender may choose to foreclose is if your home is underwater, meaning you owe more on your mortgage than the home is worth.
HELOC loan modification
If you are having financial difficulty, don’t wait to contact your lender. If you are struggling to make payments, they will usually be open to working with you. If you ignore the issue and stop making payments that can put you in an even worse financial position. Be proactive and work with your lender as there may be loan modification options available to you. Adjustments may include changing the term, interest rate or payments. Some lenders may want borrowers to prove financial hardship to obtain financial assistance. Defaulting on a loan carries an additional penalty—it will affect your credit report, which is a risk of a HELOC that can impact your chances of getting approved for credit in the future.
If you don’t already have a HELOC, consider these ramifications before you get the loan to ensure you are prepared for any future payment increases. If you already have a HELOC and are in danger of defaulting, make sure you communicate quickly with your lender for them to work with you on a solution.
Pros & cons of HELOC vs cash out refinance
HELOCs can be more risky than a home equity loan or cash out refinance because those loans have a fixed rate, so your payments will stay the same throughout the life of the loan. Learn more about the differences between a HELOC, home equity loan and cash out refinance. Freedom Mortgage can help you with a cash out refinance. Contact a home loan specialist to learn more today.