If the HELOC lender is not paid the full amount owed on the line, the HELOC becomes an unsecured debt and the HELOC lender can pursue judgment. Some borrowers stop paying their HELOC while continuing to pay their primary mortgage. In this case, the HELOC lender may decide to force foreclosure.
You typically repay the loan with equal monthly payments over a fixed term. If you don't repay the loan as agreed, your lender can foreclose on your home. The amount that you can borrow — and the interest rate you'll pay to borrow the money — depend on your income, credit history, and the market value of your home.
HELOC default and home foreclosure
However, before taking legal action to foreclose on a property, a lender will make several attempts to collect the debt. This means if you are only 1-2 months behind on your HELOC payments, you won't necessarily end up in foreclosure.
Your loan is secured by your home, which means if you miss payments or default on your HELOC, your bank or lender could repossess your property. Make sure you're prepared to manage your line of credit and that you have room in your budget once you have to start paying back the principal loan balance plus interest.
If you default on a home equity loan or HELOC, you're likely to face severe consequences. Your lender may have the right to take legal action, including repossession of your home if you've used it as collateral.
In today's market, many homeowners, including those potentially facing foreclosure, have sufficient equity in their homes that a traditional sale could be a better alternative to foreclosure. Servicers can remind homeowners that a traditional sale might be one option to avoid foreclosure.
If you have a HELOC and the value of your home tumbles dramatically, your lender could cap your balance — that is, reduce the amount of home equity you can borrow against. And if your home is underwater, your HELOC would probably be frozen and you would no longer be able to withdraw funds from it.
Implications of Foreclosure on HELOC Repayment
In this scenario, the primary mortgage often takes precedence over the HELOC in terms of repayment. So, if your property is sold, the funds go first to your original mortgage lender. Only after that can any remaining amount be used to settle the HELOC debt.
Here are some disadvantages of a home equity line of credit: Interest Rates May Rise: All HELOCs start with a variable rate and quite often it is a promotional rate that changes to a higher variable rate after the promotion ends. After the HELOC draw period (usually 10 years) a HELOC will adjust to a fixed rate.
A Foreclosure Bailout Loan is a mortgage loan that helps prevent a foreclosure from occurring on a property. It is typically used in emergencies in which a property owner needs their debt burden refinanced immediately to not lose their property.
Following a foreclosure, the equity pays fees and penalties first, and any remaining equity is yours.
The HELOC end of draw period is when you enter the repayment phase of your line of credit. You are now required to begin paying back the principal balance in addition to paying interest.
Loan payment example: on a $50,000 loan for 120 months at 8.40% interest rate, monthly payments would be $617.26. Payment example does not include amounts for taxes and insurance premiums.
“Homeowners should only do it if they are using the funds to improve their property.” A HELOC can be a worthwhile investment when you use it to improve your home's value. But it can become a bad debt when you use it to pay for things that you can't afford with your current income and savings.
If you have the cash on hand, you can pay your lender directly. If you sell the house, you can use the sale proceeds to repay the home equity loan. Alternatively, you can refinance the loan using a new one.
When you default on a loan, it could trigger a range of negative consequences, including damage to your credit score, foreclosure or repossession, collection calls and even a lawsuit. While it's best to try to avoid default, there are situations where it may be unavoidable.
In October of 2023, Bankrate data showed rates were averaging 8.75 percent on home equity loans and 9 percent for HELOCs. There is one bright spot, though: If you use a HELOC or home equity loan for housing-related repairs or remodels, the interest can be tax-deductible. That can reduce the real cost of your financing.
Chance for a lower rate: If your current mortgage has a higher interest rate and the HELOC has a lower rate, you can use the funds from the HELOC to pay off your mortgage sooner for less. This depends largely on the broader mortgage market, however — right now, rates are rising on all types of loans, including HELOCs.
Defaulting on a home equity loan can result in foreclosure if it makes sense financially for the lender. The more home equity you have, the more likely the creditor will pursue this course of action.
It's possible to refinance to avoid foreclosure. Refinancing can help you lock in lower monthly mortgage payments and make it easier to afford your mortgage. But if you've already missed several mortgage payments, finding a lender to work with will be difficult.
Refinancing Your Loan to Stop a Foreclosure
With a refinance, you to take out a new loan to pay off the existing mortgage, including the delinquent amount, which will stop the foreclosure. You will need to have a stable income and, usually, equity in the home to qualify.
If you're facing financial hardship, reach out to your lender right away to explore options that could help you bring your loan current and prevent foreclosure. You could be eligible for a mortgage repayment plan or loan modification to help avoid foreclosure.
The fastest way to avoid foreclosure is to reinstate your loan, by paying the amount provided on the reinstatement quote. The reinstatement quote can be obtained from the lender, along with a good through date. If you cannot pay your mortgage, or can only pay a portion, contact your servicer.