Home Loans

What Happens When You Default On Home Equity Loans?

If you default on home equity loans, the consequences can be severe.

Maintain your financial health and homeownership with the help of this blog. We discuss the consequences and reveal 6 tips to avoid defaulting on your loan.

2 main consequences of Defaulting on Home Equity Loans

1. Collection Agency Involvement: When borrowers default on their home loans, lenders often sell the debt to a debt collection agency.

These agencies will attempt to recover the outstanding balance through persistent calls, demand letters, and possibly sending collectors to your home. This process can be stressful and damaging to your credit score.

2. Foreclosure: In more severe cases, the lender may initiate foreclosure proceedings to recover the money lent. Foreclosure means the lender can sell your home to recoup their losses. The primary mortgage lender takes priority over the home lender during a foreclosure sale.

If the primary lender holds the certificate of title, they are entitled to the proceeds first. However, depending on the completion status and holder of the certificate of title, refinancing complications can affect which lender gets paid first.

Bad credit

6 Tips to Avoid Defaulting on Your Home Equity Loan

1. Communicate with Your Lender:

Avoiding your lender’s calls or ignoring their letters will not improve your situation. However, being transparent about your financial difficulties can encourage them to assist you.

If you’re struggling with payments, contact your lender immediately. Explain your financial situation and express your willingness to find a solution. They understand that working with you increases the likelihood of recovering their money

They may offer to modify the loan terms, adjust interest rates, or restructure your repayment plan. This can help to make the loan more affordable so you can avoid defaulting on your home equity loan.

2. Explore Foreclosure Alternatives:

If you’re struggling with payments, you could explore alternative options to provide temporary relief and prevent foreclosure.

It is worth noting that you should only do this if you lack funds due to a short-term cash flow issue. If you can’t afford repayments full stop because your circumstances have changed or you have racked up an uncontrollable amount of debt, then taking out another loan will only add to this financial burden.

Alternative forms of finance that might be suitable to prevent foreclosure include:

3. Consider Debt Consolidation:

If multiple debts overwhelm you, consolidating them into one low-rate loan with manageable monthly payments can help you regain control of your finances.

4. Refinance Your Mortgage:

Refinancing can lower your monthly payments and interest rate, making staying current on your loan easier. However, carefully consider the terms, as extending the loan term can increase the total cost over time.

5. Consult a Financial Advisor:

A financial advisor can provide valuable guidance on managing your finances and exploring potential solutions. They can help you create a feasible financial plan to navigate through tough times.

6. Resell and Downsize:

While drastic, selling your home and downsizing can be a practical solution. Use the proceeds to pay your mortgage and secure a smaller, more affordable living arrangement. This option can alleviate financial pressure and prevent foreclosure.

Don’t Default On Your Home Equity Loan

Contact Australian Lending Centre today to learn more about your options and find a suitable financial solution available to you.


What New Borrowers Need To Know About Home Equity Loans

As new borrowers, home equity loans are one of the smartest ways to use your valuable assets.

If you have a home, and you already paid off a portion of that house, then the difference between the value of your home and the total debt you owe is your equity. It is your interest in the said property.

How much can I borrow against my home equity?

You can only borrow the amount which is equivalent to your interest in your property.

For example, you bought a home worth $250,000. You made a 25% down payment and obtained a loan to cover the remaining 80% of the purchase price. The value of your home is $250,000 and your equity or the amount you contributed to the purchase price is only 25% or $62,500.

While the lender secures their interest by getting a lien on your house, you still own it. However, as much as your home equity is concerned, you only “own” 25% of it.

Supposing the market value of your home doubled in the next six months, but you still owe $187,500 (or 80% of the purchase price), your home equity will increase. But, the principal amount of your loan will stay the same. Meaning, while your debt is still $187,500 your original home equity which is $62,500 will double. This is just a simplified computation. Other factors such as accrued interests, fees and penalties will still apply.

How can I build my home equity?

  • Make double payments covering both the principal and the interests
  • Increase your initial down payment on the mortgage. Instead of the standard 20 per cent down payment you can add another 5 per cent to get exactly 25 per cent home equity, or 25% of the market value of your home.
  • Invest in home improvements such as renovations, adding energy-efficient appliances and fixing the plumbing issues.

Credit score and home equity

Before applying for home equity loans, new borrowers must be aware of their credit score. Multiple debts that spiral out of control can swiftly affect your daily life in big ways. Interests may roll over until they become difficult to repay.

Lenders are most likely to approve loan application from individuals with good credit history, or those who have repaid their credit obligations on time. People with good employment record, especially those who were able to stay in the same company for several years are considered more financially stable than self-employed ones. But, people with a low credit score do not have the same privileges as those with excellent credit history. But, if you own a home, you can use its unencumbered value to pay for your current expenses.

If you want to obtain home financing loans with favourable terms and at a lower cost, the Australian Lending Centre can help you. Aside from offering a more appealing rate, they also help you settle your multiple loans through their debt relief programs such as refinance, credit card consolidation, debt relief, debt management and debt agreement services.

Learn more about home equity loans and choose the most suitable loan products to meet your financial needs. Contact the Australian Lending Centre today!