You took out a line of credit on your house to pay for remodeling a kitchen. That project was great, but now you're having trouble keeping up with the payments on the loan because you also had to buy a new car and you still owe a bunch on your basic mortgage. The payments on all those debts add up to an amount greater than the money you have make them. Getting out from under that line of credit would help a lot.
Talk to your lender as soon as you see problems to ask for advice on what to do about the line of credit, like paying interest only. Be cautious, because having part of that loan forgiven can cause you big tax problems. Get a bank to forgive a third of your credit line, say $2,000 on a $6,000 loan, and you'll add $2,000 to your taxable income, because the Internal Revenue Service considers forgiven debt as income.
See if you might be eligible under the federal government's 2MP program to reduce a second mortgage and line of credit debt. You'll have to have your basic mortgage modified first under the Home Affordable Mortgage Program, which reduces your payments to 31 percent of your income. Your lender will have to participate in both programs. Do that and you can get your line of credit modified with basically the same terms as the mortgage. Note that as of the date of publication, the program is scheduled to expire on Dec. 31, 2013.
Ask your lender about refinancing your line of credit into your basic mortgage if you don't want to go through HAMP. See if you can consolidate the two loans, say a $125,000 mortgage and a $5,000 line of credit, into a new $130,000 mortgage and cut your monthly payments to an affordable level by extending the term of the loan. You'll have to pay some closing costs, but you can wrap those into the new loan.
Offer your equity lender the best one-time deal you can make. Use an income tax refund, a job bonus or some other chunk of money to try to get rid of the line of credit. Be prepared for two bad consequences: tax if the IRS considers your settlement as income, as it probably will, and a hit on your credit score when a loan is reported as "settled" and not paid in full.
File a Chapter 13 bankruptcy as a last resort. Threaten this and you may get a better settlement offer. If not, you'll get the line of credit wiped out, but it may take three to five years during which you'll have to continue to pay your basic mortgage and other debts. You'll also damage your credit rating with a bankruptcy and the time it requires may stretch you in other areas.
- Bankrate.com: 3 Ways to Lose a HELOC, Keep the House
- Federal Trade Commission: Facts for Consumers
- Experian: Credit Advice
- Financial Web: Negotiating the Best HELOC Rates and Terms
- Get Out of Debt.org: Why It Make Sense to Consider Debt Settlement
- Foreclosure Lawyers of America: Equity Loan Settlement
- Debt Steps: Debt Settlement
- How to Refinance a 100 Percent Mortgage
- Modification of a Note Secured by a Deed of Trust
- When Should You Refinance Your Mortgage?
- How to Refinance Without Income
- How to Pay a Mortgage Off Early
- Does a Home Equity Loan Have to Be Paid Off at Time of Refinancing a First Mortgage?
- How to Modify an 80/20 Mortgage
- How to Get a Home Equity Line