Does a HELOC put a lien on your house?
A
home equity line of credit (HELOC)
can give you a way to turn your home's equity into a line of credit you can use when needed. HELOCs have several key benefits that make them a solid borrowing choice in today's market. They operate like a revolving line of credit, giving homeowners flexibility they wouldn't have with a lump sum of equity borrowed. And the
average interest rate is 8.02%
, making them one of the most affordable ways to borrow money right now.
Like any financial decision, though,
opening a HELOC
takes some
planning
. What will you
use it for
? How much equity do you have? How long do you want your
draw period
to be? These questions are instrumental in finding the right HELOC for what you need.
Additionally, it helps to understand
how a HELOC works
so you know what to expect once you open it. A HELOC uses a
variable rate
, which means your HELOC interest rate — and HELOC payment —
can change monthly
. Additionally, any withdrawals from your HELOC during your draw period trigger interest-only monthly payments until you pay off what you borrowed or your repayment period kicks in.
Another thing to consider is that a HELOC is considered a
secured funding source
. This means your home will serve as collateral. But does that result in a lien being putting on your house? That's what we'll explore below.
See what HELOC rate you could secure here today
.
Yes, a
HELOC
puts a lien on your home. A lien is a legal term referring to a creditor having a right to ownership of what you're borrowing against, says Ralph DiBugnara, president of mortgage broker Home Qualified.
"A lien, basically, is a legally binding placeholder on the title of your home," DiBugnara says. "It's a record [that says] if you ever sell the house or refinance the house that the lienholder that you hold a debt to has to be paid off."
A lien typically gives your HELOC lender the right to start the foreclosure process if you're at least 120 days late on your payment, DiBugnara says. However, banks usually won't go straight to foreclosure because it's a tedious process, so they typically take you through three steps before foreclosure begins, he says:
If your home goes into foreclosure, your credit score will likely be impacted and the foreclosure will stay on your credit report for seven years, according to the
Consumer Financial Protection Bureau (CFPB
). A lower credit score may result in higher borrowing costs for you in the future, which means the foreclosure process can be a financial burden long after it's over.
But if you make your payments on time, you generally don't have to worry about any lender liens on your home.
Explore your current HELOC options here
.
To avoid your lien being enforced and, potentially, losing your home to the lender, it helps to know some simple
guidelines for HELOC borrowing
.
First, make sure you have a purpose for opening a HELOC. Using it for the right reasons, like
home repairs and renovations that can result in a tax deduction
, is key. After you identify the purpose for your line of credit,
decide on a HELOC amount
that fits the purpose. Borrowing significantly more money than you need could lead to overspending and increase the chances you fall behind on your payments. And, avoid taking out a HELOC to cover everyday costs like groceries and gas, DiBugnara says.
"If you're taking out a HELOC to pay your daily expenses, you may put yourself in a position to have a problem," he says.
Using a HELOC to cover everyday costs is a sign that you might be in financial trouble, which means you could be in jeopardy of missing HELOC payments and, possibly, going into foreclosure. If you find yourself in that position, an unsecured lending option like a
personal loan
or
credit card
may be a better option since you don't have to offer collateral to get funding.
HELOC lenders typically place a lien on your home's title if you open a line of credit with them. The lien gives your lender the right to foreclose on your home if you default on your HELOC payments. However, most lenders want to avoid the foreclosure process and will offer you alternative options before it gets to that point. Borrowing a HELOC responsibly, both in the decisions you make before you open one and how you handle your spending after it's open, can help you avoid ever having your HELOC lender's lien become an issue.
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