What happens if you take out a HELOC and don’t pay it back? From what I understand, the bank puts a lien on your property. But what does that mean, exactly? My understanding is that it means that the bank gets their money first once the home is sold.
I have no children and, really, no one to leave my house to (my plan is to have my sister/attorney/executrix sell it and do as she pleases with the money). If I took out a HELOC and didn’t pay it back, would all this just be sorted out after Mrs. H and I shake off this mortal coil? Would my sister’s cut of the money just be Sale Price minus Bank’s Cut? Would the bank just be sitting on a lien until Mrs. H and I died?
Well, first, opening a HELOC doesn’t mean you have the money yet. It’s a line of credit, so you can have one and just not borrow against it.
But assuming you mean opening a HELOC, withdrawing the max, and not paying it back, then the bank can potentially foreclose on the property. The bank wouldn’t necessarily do this as a first step, but you can absolutely lose your home while you are still alive by not making good on the credit they’ve extended (plus the interest, oh never forget the interest!).
ETA: Note, the mortgage company still gets ‘first’ dibs on the money in a foreclosure. So if you’re underwater on the house, the bank wouldn’t get squat in a foreclosure - the mortgage company would - but most banks would be wary of giving you a HELOC for vastly more than the equity you have built in the house.
IIRC Florida’s Homestead law protects a primary home from debt collectors (except for a mortgage or a lien). Is this a mortgage or a lien? (I do not know)
In Florida, it is my understanding that a mortgage or lien is not covered because it is a debt made voluntarily by the property owner against the property itself, so a HELOC foreclosure can still happen to a primary residence as the bank can put a lien against it.
If it comes to it, they’ll foreclose, collect their balance (principle, interest, and plenty of fees) and hand you a check for the excess.
I imagine other lenders and lienholders would probably get their cut first, so your “excess” could possibly be negative and you’d still be in debt to whomever was last in line.
And this would make it much more likely that the mortgage holder would foreclose. Many times the holder of the HELOC mortgage will not start a foreclosure because they are in a second position behind a mortgage holder that would eat up most of the equity and the HELOC holder would be short changed. If you take a HELOC for only 15% of the equity, they are guaranteed to receive the full balance due in a foreclosure, so they would very likely be aggressive in moving to foreclose. This is in addition to the other things they would do, such as destroying your credit. In addition to the interest they would charge, there would be substantial fees and penalties.
No. HELOC’s require monthly debt service, principal and interest. If you don’t pay them back they will forclose on the 2nd mortgage they have on your property.
You could draw the money on the line of credit (which will accrue interest at a higher rate than a standard mortgage), and save enough from the draw to make your monthly payments until you die, but you better know when you are both going to die, before you spend the rest on that trip around the world.
A HELOC is essentially a mortgage. We had a HELOC instead of a mortgage when we first built our house. It was good for 75% of the house value, and like a mortgage, we were obliged by the terms to keep the house insured. So as others say, if you default, they foreclose just like a mortgage. (In Canada - YMMV)
The advantage to us was that the HELOC was almost the same rate as a regular mortgage, back when rates were insanely low. So we could pay it off as fast or slow as we wanted, or even go backward if we wanted to spend some big amount. (We added a car to the HELOC balance at one point). With a regular mortgage you could only pay so much a year, and could pay down the principle only 10% extra once a year. Also, if we did not want to pay anything that month, the interest simply got added to the HELOC balance.
I suppose you could treat a HELOC as a reverse mortgage, with the bonus that it is flexible in what you take out at any one time, and the less you take out, the less interst accrues. However, there’s always the warning that depending on timing and expenses, you may find yourself with interest due on a maxed out HELOC. Then you decide if you sell now or let the bank foreclose.
Note there’s a good chance with a HELOC against 75% of my house, in that situation I could end up with the house selling for more than what I owed. So it would be better to sell it myself then, instead of letting the bank do all the work and pay a decent amount in extra legal fees for the foreclosure process.
I guess too, in the state of Florida and others, what’s the legal status of a HELOC? Presumably if you racked up big debts (good old USA medical debt), your creditors can attach you bank accounts but not take your house. So can they force you to max out your HELOC? Or can you continue to live off the occasional withdrawls from the HELOC without the debtors being able to intercept them?
IIRC, OJ Simpson continued to live the good life in his $25M Florida mansion despite owing millions to Goldman’s relatives… I’m not sure how.
I think this only recently changed in some states. IIRC Michigan would foreclose and keep all the money from the sale no matter how much was left over. It is insane that they did this and worked to defend the practice but I think it was only very recently overturned by the courts (after having existed for a long time). I am not sure if other states do this or if this ruling would apply to them.
There are some differences, but these used to be called second mortgages and were considered somewhat disgraceful, a sign you couldn’t handle your money. So they were renamed and rebranded. Now the advertising makes it appear that a HELOC is a savvy financial decision instead of paying twice for the same house.
OK, it can be a good idea. We took out a HELOC when we did tore out our kitchen and rebuilt it from the walls. Getting a HELOC gave us a better interest rate and also meant that when we repaid it didn’t have to go through the same getting approved rigamarole if we wanted another loan. We were in good financial shape at the time though. Even so, it was a reminder that houses need continual infusions of money.
Debt is not something to be entered into casually. It can bite you. My parents took out a mortgage (or possibly second mortgage: the records aren’t clear) to pay for my grandmother’s hospital bills and then lost the house when he was out of work for a year after a back injury. They never recovered.
Reverse mortgage-holders get foreclosed on every day. Some of the reasons: failure to ‘maintain the property’ (e.g. put on a new roof when the lender says you must); failure to pay property taxes; failure to make property-insurance payments on time.
Also they are more expensive ways to tap your equity than are HELOCs or standard home-equity loans. More fees, more interest, more mortgage insurance. And you can wind up with no equity (as opposed to HELOCs and home equity loans, with which you increase your equity with every payment).
Be wary of reverse mortgages. Note that NO major bank wants to be associated with them in any way.
The bank I have my mortgage through (JP Morgan Chase) insisted all those listed things are under their control. They pay my property taxes. They pay my insurance (I can choose my own insurance as long as it meets some minimums the bank wants).
My credit rating was (and is) top notch and I was well within means for my place. I was told by my attorney that the bank wants to be the first in line if something goes wrong. They do not want to lose rights to the property because someone else has a better claim.
Personally, I prefer it this way. I pay one payment to the bank each month and they make sure all the rest of that stuff is taken care of.
I am surprised other lenders don’t do it the same way.
ISTM any lender would want to make sure this other stuff gets paid. Why leave it as an option?
I did not press my bank about it but it seemed the taxes were obligatory to get the loan and the insurance was an option (I may have that reversed or wrong…it’s been a long time now but the bank seemed keen on me doing it this way and, frankly, I’m not sure why someone wouldn’t want to do it this way since it is so much easier).