Home Equity Loans and Home Foreclosures

Homeowners who default on their mortgages may eventually face a foreclosure

, where the lender or bank will sell the home to get back the outstanding loaned amount. Since the last couple of years, the housing market is reeling under several foreclosure sales as borrowers are failing to make mortgage payments due to the prevalent financial crunch and high rate of unemployment. Homeowners are also defaulting on their home equity loans and HELOCs (home equity lines of credit), and to worsen matters their home values are now lower than when they took these loans.

How to avoid foreclosure

If you have taken out a mortgage and also an equity loan, but realize that you cannot afford to make payments towards both, you can still avoid a foreclosure by paying off the right loan. A mortgage is a loan with which you buy a house, paying back the lender a pre-determined amount every month. The mortgage loan is a secured loan with your house as collateral. If you default on the payments, then the lender has the right to seize your property and sell to a different buyer.

A home equity loan is also a loan or sum borrowed against your home equity. Say, your home is worth $250,000 and you owe $100,000 to the lender, then the equity in your home is $150,000. The bank may provide you with a $75,000 home equity loan as they are sure that they will recover that amount by selling your home if you were to default. Home equity loans are secured against the rising market values of homes. But if the value of your home drops to $170,000 instead of $250,000, then your home has lost the equity it had previously. In such cases, the secured' loan becomes more like an unsecured' loan as there is no collateral to speak of.

When you are facing a cash crunch and have to decide between paying for your mortgage or home equity loan, then it is advisable to make timely payments on the mortgage. The size of the home equity loan is smaller than the mortgage, but the priority should be continuing on the mortgage payments. When the equity in your home is no longer there, then it becomes much more difficult for the lender to fight you. If you were to default on your home equity loan, the lender usually exercises one of the two options. The bank can modify the terms/rates of your loan or sue you in court just as if you had defaulted on an unsecured loan. Even if you do lose the case, a modified payment plan will be put in place so that you can more easily repay the borrowed sum.

What happens to a home equity loan after foreclosure

If the sales proceeds are enough to cover the mortgage and home equity loan amounts, then you will not have to face any further debt issues. With the fall in house prices, if the money generated through the home sale isn't enough to pay off both loans, then you will owe the lender money and can be sued in court. This rarely occurs as lenders are cautious while granting home equity loans to homeowners and offer amounts that factor in home equity available and other considerations before granting the loan.

Home Equity Loans and Home Foreclosures

By: Jeff Livingston

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