A home equity loan can be a convenient and relatively inexpensive way to access money that you can use to pay off credit cards, make home improvements or finance a child’s college education. It’s also risky. If you don’t make the required payments on time, you may wind up in trouble, especially if you don’t address the issue head-on.
Possible Consequences of Missing Payments
If you fall behind on home equity loan payments, you will be assessed late fees. Missed payments can also negatively impact your credit score, which can lead to high interest rates for a new loan or credit card or make it difficult to qualify at all.
A home equity loan is considered a junior or subordinate lien. In foreclosure proceedings, lienholders are paid based on seniority. If you have a significant amount of equity, the home equity lender may foreclose since it will have a good chance of recovering at least some of what you owe. If you have little or no equity, the lender may be less inclined to foreclose since the first mortgage will take priority and the home equity lender may wind up with nothing. The home equity lender may, however, file a lawsuit against you and have your wages garnished.
If the housing market takes a downturn, your home may lose value. If you have tapped into your home equity, you might wind up owing more than your home is worth, which could make it difficult to sell your house. If you decide to take out a home equity loan, only borrow what you need so you will have enough equity remaining to hopefully avoid winding up underwater.
If you decide to sell your home, any liens on it will have to be cleared before someone will be able to secure a mortgage to buy the property. That means if you sell, any profit you may have will be reduced by the amount you owe on the home equity loan.
Get in Touch With Your Lender Right Away to Find a Solution
If you already have a home equity loan and you can’t afford your payments, contact your lender, explain your situation and discuss your options. The lender may offer to modify your loan term, interest rate and/or monthly payment.
The worst thing you can do is to put off addressing the issue. A lender will be much more willing to work out an arrangement with a customer who is upfront and proactive than with one who doesn’t respond to letters or try to rectify the situation. Get in touch with your lender as soon as you realize that you won’t be able to afford your loan payments.
