Am I Risking Foreclosure for Non-Payment of a Home Equity Loan?

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As we’ve talked a lot about here on our law blog, failure to make your home mortgage payments on time can quickly lead to your lender filing a foreclosure case against you. Lenders file foreclosure on non-paying debtors in order to repossess the home that was purchased with the borrowed money. After they officially foreclose and evict you for non-payment, your lender will put the property up for a foreclosure sale – also known as a Sheriff’s Sale. This allows the lender to recoup at least some of the money that you owe.

Now let’s discuss the concept of a second mortgage (sometimes called a home equity loan). Most second mortgages are taken out by homeowners in order to pay for home repairs or improvements. Some second mortgages are taken out to buy a second home. Second mortgages can also be used to repay a significant debt. It’s never a good idea to take out a home equity loan for something impractical like an extravagant vacation, but it has been done.

Second mortgages, a/k/a home equity loans, are attractive to homeowners because of their relatively low interest rates. Since you’ll be using your home as collateral for the loan, you can usually borrow a significant amount of money this way without having any limits or rules regarding how you use the funds. Also, any interest you pay on this type of loan is often tax deductible.*

Can I lose my home to foreclosure if I default on my second mortgage?

If you’ve had a significant life event that has had an impact on your finances, such as job loss, divorce, injury, disability, etc – it can be tempting to stop making the payments on some of your debts.

Although it may seem like an acceptable option when you’re strapped for cash, failure to make your monthly second mortgage payments can have catastrophic results. Unfortunately, many people do not know what can happen if they stop paying their home equity loan.

Even if you only plan to miss several payments so that you can “catch up” on some of your other financial obligations, your second mortgage lender has every right to begin foreclosure proceedings. Whether they will initiate a foreclosure depends on how much (if any) equity exists in your home.

What is “equity”?

To have “equity” in your home simply means that your home is currently worth more than you still owe on the original (first) mortgage.

If your home has at least some equity when you start missing payments on your home equity loan (second mortgage), your second mortgage lender is likely to foreclose on the property, hoping to salvage at least a portion of the amount you still owe.

Supposing your home has no equity, the second mortgage lender is unlikely to proceed with a foreclosure because they wouldn’t receive any money recovered through the Sheriff’s Sale. In this situation, the original mortgage lender would almost always file for foreclosure and they would be entitled to any funds recovered.

If your home is underwater when you stop making payments on your home equity loan, your second mortgage lender still has a right to money they are owed. Often in these situations, second mortgage lenders will sue delinquent debtors for the amount still owed on the home equity loan. Your wages may be garnished in order for the lender to recover their losses.

 

*Always check with your tax advisor.
Image credit: A.Eelectrik

 

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