What Happens to a HELOC During Foreclosure?
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About HELOCs and Foreclosure
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A home equity line of credit (HELOC) is a loan that uses the value of the borrower's equity as a means to secure his debt obligation. When the borrower is unable to pay the debt on a HELOC, the lender is entitled to foreclose on the property, take possession of it and sell it in an attempt to recoup the value of the money owed. Since home equity makes up a large share of the net worth of many individuals, a HELOC can be a tempting source of quick money loaned at an attractive interest rate. Before getting a HELOC, be aware that it differs from a mortgage in the event of foreclosure.
First Mortgages Have Priority
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If a home goes into foreclosure, a first mortgage takes precedence over any second mortgages or HELOCs placed on the home. This means that the first mortgage lender has the power to foreclose on the property, sell it and attempt to recoup the value that it is owed before the HELOC lender. Considering foreclosed homes have often declined in value and the transactional costs involved in selling a home, the entire sale price of a property often goes toward fulfilling the first mortgage, leaving no money to compensate the HELOC lender. While the first mortgage lender cannot attempt to collect money beyond the value of the home's sale, a HELOC often persists after the sale of the home, making foreclosure under a HELOC dangerous for the borrower.
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HELOCs are Recourse Loans
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Most HELOCs are recourse loans, which are loans that make the lender entitled to collect on the money owed, regardless of the value of the property originally used to secure the loan. This means that if the sale of the home does not satisfy the amount owed on the HELOC, the lender can sue the borrower if he does not continue paying and attempt to take possession of other pieces of property or garnish wages. In most cases, a HELOC can be discharged in the event of bankruptcy, which is sometimes the only recourse borrowers who counted on the sale value of their home to cover all their secured obligations. Since HELOCs will follow the borrower until bankruptcy, it is imperative that the line of credit is used sparingly like a credit card, rather than a periodic source of income like an annuity or reverse mortgage.
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