Can’t make the Payments on your Home Equity Loan?

Taking out a home equity loan can be an excellent financial decision. Interest rates are generally better than those on credit cards and other loans and the money can be used for major expenses.

However, too many people take out a home equity loan and simply cannot afford to make the monthly payments. Around 1% of homes are in the process of foreclosure at any one time – the most home foreclosures can generally be found in the South East and Midwest.

In theory, a home equity loan will only be for the extra amount that your home is valued at, above the mortgage amount – although lenders have also made it possible to borrow 100% or more of your home’s value. Not surprisingly, this has caused some borrowers to overstretch themselves.

In some areas of the country house prices have also decreased – and if you sell your home, you have to pay back the balance on the loan at the same time you sell.

So what actually happens if you simply can’t afford the payments? Firstly, if you are late with the occasional mortgage payment or equity loan payment, don’t panic. Almost 5% of homeowners are late on mortgage payments at any one time; furthermore most loans have a grace period in which to pay it.

Financial experts advise that if you can’t make one or more payments, the first step is to contact your bank or lender, explain the situation and see if they will work with you. Banks would rather come to an agreement with a customer if possible, and avoid the cost and work involved with foreclosing on a property. In some states, foreclosure is not only costly – it can take a year or more to complete.

In general, a lender will start to notice if a loan payment is 16 days or more late. They will first contact the lender by mail and/or phone to gently remind them. If a payment is a month behind and it seems likely that the next payment will be late too, banks tend to take the matter more seriously.

If monthly payments are missed for three months, at that point the bank will probably hand the case to an attorney who will start the process of foreclosure. The bank may also offer some kind of loan repayment plan such as adding on the missed amounts to the next two or three payments, in order to catch up.

You may also have the option of a so-called loan modification plan. Such a plan is designed for the customer who really just can’t afford the payment, rather than someone who misses one or two. To make monthly payments lower the lender may lower the interest rate or “roll over” missed payments into a new package.

And if you still cant make the payments? Eventually you will have to declare Chapter 13 bankruptcy and your home may eventually be foreclosed. However, declaring bankruptcy could at least buy you some time – the foreclosure process is halted temporarily and your lender may have to agree to an alternate plan, which allows a longer term for repayments.

Be sure to take out a home equity loan only if you can actually afford it – your home really is at stake.