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Wondering what happens to your home equity line of credit when you enter default on your first mortgage? This guide helps you understand and prepare for the process.
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What happens to my HELOC if I default on my mortgage?

Defaulting on a HELOC or mortgage can be scary and overwhelming. This article will help you understand what to expect and how to negotiate with your lenders.  

Understand what happens to your HELOC if you default on your primary mortgage

When you miss payments on either your first mortgage or any second mortgage, such as a home equity loan or HELOC, you are at risk for default and foreclosure on your home. This means the bank could sell your home in order to recoup the funds for the missed payments and to reduce the risk of future non-payment. 

If you have gone into default on your primary mortgage, it is best to continue to try to make your HELOC payments if possible, until you are able to negotiate with your lender(s). Call your lender(s) as soon as you realize you are having trouble making payments, or foresee being unable to make payments in the future. Lenders are often more willing to negotiate terms when you have open communication than once several months of payments have been missed. 

Key Takeaways

  • A mortgage, home equity loan, or home equity line of credit, goes into default when a borrower fails to make payments over a period of time (usually 3 months)

  • Going into default on either a primary mortgage or secondary lien (such as a HELOC) can lead to foreclosure, which is when the bank takes ownership of the property in order to sell it to fulfill the loan

  • If you are facing default or concerned you might default on either your HELOC or first mortgage, contact your lenders immediately in order to renegotiate loan terms

What happens if I default on a HELOC?

If you default on a home equity loan or HELOC, you’re likely to face severe consequences. Your lender may have the right to take legal action, including repossession of your home if you've used it as collateral. In some cases, your lender may also be able to take you to court in order to collect on any remaining balance that's still due. As well as financial penalties or even foreclosure proceedings, this could result in a long and expensive legal process for you.

In most cases, the bank will first attempt various efforts to get payment from the borrower. These might include entering into repayment agreements or charging off accounts. If none of these are successful, the bank may pursue more aggressive collection options like placing late fees, seeking judgments through civil litigation and garnishing wages. Additionally, a lien may be placed against your property depending on what was agreed upon when signing up for the loan. As soon as a lien is placed on a debt, it is virtually impossible to borrow against that piece of property again until you have paid off all your obligations in full including any interest and late fees that were incurred during this process.

Missing a payment on your home equity loan or credit line can be a scary experience. Luckily, most lenders have built in provisions that offer a bit of flexibility and leniency regarding payments. Many lenders provide grace periods of up to 10-15 days following the original due date, and if you make your payment within this window, you won’t face any late fees. If however, you remain delinquent after the grace period has ended, you will likely need to pay a late fee as determined by your contracted agreement with the lender, which is usually around 5% of the payment amount due.

Failing to make payments for longer than three months may prompt your home equity lender or HELOC program to take further action. Most lenders will continue to reach out in order to set up some sort of payment plan but taking extended actions such as filing collections, repossessing collateral assets and initiating foreclosure proceedings are all possible steps taken by them if needed. Make sure to periodically check in with your lender and agree upon an affordable arrangement for repayment before it gets pushed too far down the line.

What happens to my HELOC if I default on my first mortgage?

When it comes to facing foreclosure on your home, the repercussions are the same regardless of whether it’s your primary mortgage or a home equity loan or HELOC. Foreclosure means that you will lose your home and all the money you have invested in it. The cash generated from its sale first goes to pay off your existing mortgage, then to any other lenders holding a lien on the property—including HELOCs and home equity loans. This means that if you have taken out any of these types of loan products but fail to repay them in time, you risk having both your primary mortgage and your home equity loan in danger of foreclosure should you not be able to make payments.

The consequences of this loss aren't limited just to losing one's house. When a foreclosed-upon home is sold, it typically goes for much lower than its market value, thus decreasing available funds for all creditors with a lien on it– including those who hold HELOCs and other second mortgages. This can leave them deeply in the red, significantly reducing their expected return on investment and potentially endangering their ability to get borrowing power for future loans. 

What to do if you can't make mortgage or HELOC payments?

If you are facing foreclosure, it’s important to understand that, like many other processes, foreclosure can take time. This means there is an opportunity to stop the foreclosures if one acts fast enough. There are a few tactics to help stop the foreclosure proceedings in time and possibly save your home.

The first step is communication. Make sure to contact your lender or mortgage servicer as soon as possible and discuss alternatives with them. This could be refinancing, a loan modification or even selling the house for whatever amount possible. Another solution would be a repayment program where you work out a plan that allows you to pay back past-due payments slowly over time.

Additionally, government programs such as FHA Secure may provide some mortgage relief for certain homeowners or loan restructuring programs that change the terms of your loan-making monthly payments more manageable. Finally, consider filing bankruptcy which may allow potential debtors more time to get on their feet before foreclosure is completed. These methods are not one size fits all so discussing each option in depth with one’s lender is essential to understanding the best course of action moving forward.

The bottom line

A home equity line of credit (HELOC) can be a valuable tool for homeowners to get the cash they need out of the equity they have built up in their house. However, managing repayment of a HELOC and a primary mortgage can be overwhelming, and sometimes life throws us unexpected curveballs that impact our ability to repay. If you are at risk of default on your first mortgage or have already gone into default, you are at risk of foreclosure and losing your home. Any money made by the bank in your home sale will be used to pay off both the primary mortgage and HELOC debt

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