A home equity line of credit, or HELOC, is an alternative source of credit for homeowners. The bank extends a line of credit based on the fair market value of the residential property and the owner's credit score. A HELOC serves as a revolving credit line without many of the rules that credit cards or loans carry. The interest rate on a HELOC is usually substantially lower than that on a credit card.
Features
A bank offers a HELOC based on a percentage of a home's appraised value. Using a predetermined calculation of value based on property appraisal and creditworthiness, the bank uses the customer's house as collateral against the debt. The bank retains the right to freeze or drastically reduce the amount of available credit if it believes the property value of the home has severely declined.
Significance
The bank may send a "call notice" to the customer requiring him to pay down the HELOC or pay it in full by a certain date. If the line of credit is called, the homeowner must pay any outstanding debt, in full, by the due date. Often, drastic calls for HELOC repayment are due to a sharp decline in property value, which a homeowner may be able to dispute. Banks have been known to freeze or call for payment upon learning of a change in the owner's financial circumstances.
Work With the Lender
When a homeowner receives a call notice for a large sum and knows in advance that payment by the due date will be impossible, he should contact the lender as soon as possible. Learn the bank's rationale behind asking for the payment before deciding on the next steps to take. A homeowner may want to dispute a bank appraisal that drastically reduces the estimated value of his home. It may be possible to set up a payment arrangement or extend the due date to avoid further action.
Penalties and Default
Late payments on a HELOC can result in fees, a reduced line of credit and a negative impact on the borrower's credit score. Because home equity lines are secured by the customer's house, the bank has the legal option to pursue a lien against the property and a judgment against the borrower. If the home itself has very little equity, lenders may enlist the help of a collection agency before pursuing a judgment in court. The borrower should make every attempt to avoid default, as a successful judgment against him from the bank can result in garnished wages and a significant decline in credit score.
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