home equity

Default on HELOC but keep the house?

Steve BucciDear Debt Adviser,
I have a home equity line of credit, or HELOC, with an adjustable rate. I have been paying the minimum payment on time every month since 2007. That's about $18,000 free money I have given the bank. I am tired of paying and not seeing any change on my balance. My house is worth about $200,000. I owe about $160,000 on the house, and the balance on my HELOC is $81,000. If I default on the HELOC, what should I expect? Can I lose my home? I am in California. Is there any type of help for my situation? Neither bank is willing to help.
-- Rick

Dear Rick,
Free money? Not from where I sit. You look like a high-risk loan that is about to default. Once you do, you will get the free money by not paying back what you promised. From what you state in your letter, it sounds as if you have been making interest-only payments on your HELOC loan for the past 4 1/2 years. Most equity line of credit loans allow the flexibility of making interest-only payments for a certain amount of time. It is likely that the time frame for interest-only payments on your loan will end soon, and you will have to begin paying back both the interest and the principal. This means your monthly payment will increase.

The $18,000 that you call "free money" for the bank is actually the cost (interest charges) of having and using the $81,000 that you borrowed using your home as collateral. Because the loan is secured by your home, yes, you could lose your home to foreclosure should you decide to default on the HELOC. When one lender forecloses, typically, both lenders (first and second mortgages) will foreclose.

My recommendation is that you visit with or call a U.S. Department of Housing and Urban Development-approved housing counselor to determine what options you may have. I recommend that you call the Homeowners HOPE Hotline at (888) 995-4673. The housing counselors are familiar with the foreclosure laws that apply in your state and can walk you through the consequences of nonpayment.

The counselors will also know what programs may be available to you to help you stay in your home if that is what you decide you want to do. If there is a way to make your situation work, these guys should be able to find it.

Unfortunately, many homeowners are in similar situations to yours and are facing the possibility of losing their homes or have already lost them. Depending on your current financial situation and your prospects for improving it in the near future, because you live in California, losing your home to foreclosure may be a viable solution.

California is a nonrecourse mortgage state. That means simply that if you default on your mortgage, the only recourse the bank or lender has is to take the property. They can't sue you or attack your wages or sell your firstborn. Your HELOC may or may not be a nonrecourse loan. You will need to check your loan paperwork or seek the advice of an attorney.

Yes, your credit will be devastated by the foreclosure, but your finances will have a chance to improve if you make some better decisions going forward. Don't lose hope about owning a home again sometime in the future. But for now, renting looks like it may be your best option.

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