HELOC, Debt and Foreclosure
HELOC and Debt
A HELOC differs from a conventional home equity loan in that the borrower is not advanced the entire sum up front, but uses a line of credit to borrow sums that total no more than the credit limit, similar to a credit card. HELOC funds can be borrowed during the “draw period” (typically 5 to 25 years). Repayment is of the amount drawn plus interest. A HELOC may have a minimum monthly payment requirement (often “interest only”); however, the debtor may make a repayment of any amount so long as it is greater than the minimum payment (but less than the total outstanding). The full principal amount is due at the end of the draw period, either as a lump-sum balloon payment or according to a loan amortization schedule.
Another important difference from a conventional home equity loan is that the interest rate on a HELOC is variable. The interest rate is generally based on an index, such as the prime rate. This means that the interest rate can change over time. Homeowners shopping for a HELOC must be aware that not all lenders calculate the margin the same way. The margin is the difference between the prime rate and the interest rate the borrower will actually pay.
HELOC loans became very popular in the United States in the early 2000s, in part because interest paid is typically deductible under federal and many state income tax laws. This effectively reduced the cost of borrowing funds and offered an attractive tax incentive over traditional methods of borrowing such as credit cards. Another reason for the popularity of HELOCs is their flexibility, both in terms of borrowing and repaying on a schedule determined by the borrower. Furthermore, HELOC loans’ popularity may also stem from their having a better image than a “second mortgage,” a term which can more directly imply an undesirable level of debt. However, within the lending industry itself, a HELOC is categorized as a second mortgage.
This, we are sure, is the tip of the iceberg.
Of course, you need to have equity to borrow from equity. In the early 2000’s, people could borrow up to 100% of the value of their home. No longer. Most lenders limit a home owner to borrowing 80% of home value, and also ask for good credit and income.
HELOC: Your payments could rise
Since HELOCs have variable interest rates, the amount of the monthly repayment could rise dramatically if interest rates rise.
HELOC and Foreclosure
On the other end of things, a HELOC can also be collected on after your foreclosure. A home owners could try to create a repayment plan with the lender. Another option is bankruptcy, since after a foreclosure the HELOC is not being secured by any property.
‘Non-recourse’ means that mortgage lenders foreclosing without the courts can’t pursue homeowners for any post-foreclosure balances. Debt collection agencies buy lender debt like HELOCs at discounts and then try to collect from the original borrowers. Dealing with debt collection can be made easier by insisting debt collectors abide by the Fair Debt Collection Practices Act.
If you are having problems with debt relief, foreclosure, foreclosure mediation, credit card debt or bankruptcy, phone Axsmith Law LLC at (202) 285-5415.