Low-interest home equity lines of credit seem like a great idea when you need some cash to fix up your pad or to pay down your credit card debts. However, these mortgage products can come back to bite you if you suddenly find yourself strapped for cash. You can try to work a deal out with your lender, but if you fall behind on your payments you could lose your home even if you are up to date on paying your first mortgage.
When you take out an equity line you sign a security agreement, and this document gives your lender the right to place a lien on your home. If you fail to settle the debt a lien holder can file a motion to foreclose, and the proceeds from the home sale are used to pay off the loan balance. You are technically in default when you fall more than 30 days behind on a loan payment. State laws determine how quickly your lender can begin foreclosure proceedings, and timelines vary from months to years. However, you can save your home if you manage to raise the money to settle the debt before the foreclosure actually occurs.
Your home equity or lack thereof may actually work in your favor if you default on your home loan. Typically, foreclosed homes are sold at auction and in many instances these properties sell for less than market value. After a foreclosure sale, the first lien holder has the first claim on the sale proceeds. In some instances there are not enough funds left to settle the second lien. If you have a first mortgage as well as an equity line, your second lien holder may think twice about foreclosing because the legal costs involved in the process may exceed the funds the lender actually receives after the sale occurs. Raise this topic with your lender and see if you can instead enter into a loan work-out arrangement by stretching out the term to reduce your payments.
Assuming that you are not upside down on your home, you can avoid the embarrassment and hassle of a foreclosure by simply selling your house. Regardless of the work you have put into the property, you may grow to loathe it if the price you pay for living there includes constant calls from debt collectors, ruined credit and an eventual court case. You may actually improve your overall quality of life if you sell the house and downsize to a pad that fits within your budget. If your cash flow problems are only temporary you might consider renting until you can afford to jump back on the housing ladder.
Faced with negative equity and spiraling debts, some people have chosen to strategically default on home loans and happily surrendered their keys to the lender. However, many states have recourse laws that enable your lender to sue you after a foreclosue sale if the home auction fails to generate enough cash to settle the debt. Your lender may wait several years until you are back on your feet before asking a judge to place a lien on your new home or to garnish your bank account. Ask an attorney to check the settlement contract before you enter into any kind of deal to surrender your home.
- Thinkstock/Comstock/Getty Images