Dear Debt Adviser: I have a home equity line of credit, or HELOC, with an adjustable rate. I’ve made 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 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 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’s likely that will end soon, and you’ll 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 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 default on the HELOC. When one lender forecloses, typically, both lenders (first and second mortgages) will foreclose.
I recommend that you contact a U.S. Department of Housing and Urban Development-approved housing counselor to determine what options you may have. Call the Homeowners HOPE Hotline at (888) 995-4673. The housing counselors are familiar with the foreclosure laws in your state and can walk you through the consequences of nonpayment.
The counselors will also know what programs may be available to help you stay in your home, if that is what you decide you want. 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 and face the possibility of losing their homes or have already lost them.
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 an attorney’s advice.
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. But for now, renting looks like it may be your best option.
(Steve Bucci is the author of “Credit Management Kit for Dummies.” Email debtadviser(at)bankrate.com. See more Debt Adviser columns at Bankrate.com.)
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