Home equity loans and home equity lines of credit (HELOCs) are two key types of debt used to tap the equity in your home. Defaulting on either can result in foreclosure, but what the lender will actually do largely depends on the amount of equity you have in your home.
Your home is the collateral for a home equity loan or HELOC, so if you can't repay either, you could potentially lose your home to foreclosure.
Key Takeaways:
A HELOC goes into default after 2 months of non-payment. Once in default, lenders can try to obtain payments via a credit collection agency, have your wages garnished, or foreclose on your property.
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.
While having an unused HELOC can be advantageous in many ways, it's essential to be aware of the potential costs. Some HELOCs come with annual fees or maintenance fees, which you might still have to pay even if you don't use the credit line. The fees you could incur, even with an unused HELOC, include: Inactivity fees.
Some banks will charge a maintenance fee (either monthly or annually) if you do not use the line of credit, and interest starts accumulating as soon as money is borrowed.
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.
Your home provides security to the lender that you would pay back the debt. If you owe money for most other debts like credit cards and medical bills, you (usually) did not sign a security agreement. So, the creditors cannot seize your home to pay the debt.
Defaulting on any payment will reduce your credit score, impair your ability to borrow money in the future, lead to charged fees, and possibly result in the seizure of your personal property.
Your account may be suspended. The lender may also be able to take the money you owe directly from your checking account or any other account you have at that bank or credit union. This is called “setoff.”
Banks could also freeze your account and stop additional extensions of credit if there has been a "significant decline" in the property value since the HELOC was approved. Review your account agreement for policies specific to your bank and your account.
As additional debt, it can ding it — but can also boost it as an enhancement of your total available credit. Basically, a HELOC's impact on your credit score usually comes down to how you manage the account.
If you have money in U.S. government money market funds, U.S. Treasury money market funds, or treasury bills maturing in June or July SELL those securities and hold cash deposits or perhaps even prime money market funds until the debt ceiling crisis is over.
If you don't respond to the default, the company you owe money to will prevent you from using any more credit and cancel your account with them. Things could escalate if your creditor decides to take further action to recover the debt.
Default: Debtors have been passed behind the payment deadline on a debt whose payment was due. Illiquidity: Debtors have insufficient cash (or other "liquefiable" assets) to pay debts. Insolvency: A legal term meaning debtors are unable to pay their debts.
A mortgage lender can consider your loan default after just 30 days of non-payment. And after 120 days, they can begin the foreclosure process to seize your home. Besides depriving you of a place to live, a foreclosure will wreck your credit and stay on your reports for seven years.
If your personal loan is unsecured, which is often the case, the lender doesn't have any collateral to seize if you fail to repay. As mentioned previously, however, a collection agency may try to sue you for the unpaid amounts you owe, attempt to garnish your wages, or place a lien on your home through a court order.
Having a default on your credit file can make your mortgage application more tricky, but it's not impossible. It'll be easier if your default is satisfied, and you might even get a more competitive interest rate. However, you still have options even if your default isn't satisfied.
Calculating the monthly cost for a $50,000 loan at an interest rate of 8.75%, which is the average rate for a 10-year fixed home equity loan as of September 25, 2023, the monthly payment would be $626.63. And because the rate is fixed, this monthly payment would stay the same throughout the life of the loan.
If you took out a 10-year, $100,000 home equity loan at a rate of 8.75%, you could expect to pay just over $1,253 per month for the next decade.
"I am of the belief rates for HELOCs will fall in 2024, as well as interest rates in general," says Mark Charnet, founder and CEO of American Prosperity Group. "This means the varying rate of a HELOC will benefit mortgagers as the rates fall." The Federal Reserve adjusts interest rates in response to economic activity.
In general, it's better to leave your credit cards open with a zero balance instead of canceling them. This is true even if they aren't being used as open credit cards allow you to maintain a lower overall credit utilization ratio and will allow your credit history to stay on your report for longer.
The Bottom Line
For ongoing credit needs, revolving credit sources like credit cards or line of credit are the most useful, but may come with increased fees. Loans may have higher upfront fees but could cost less in the long run. Evaluate your credit needs before applying to find the best fit.