What happens if i dont pay heloc

HELOC repayment terms vary but can be as long as 20 years. Unlike some other forms of credit, such as personal loans or home equity loans , most HELOCs have variable interest rates.

Because the HELOC has a variable rate, your payment can change from month to month as the interest rate increases or decreases.

If you took out a HELOC and your draw period end date is approaching, here are some things you can do now to ensure you transition smoothly into repayment:. As your draw period comes to an end, your bank will send you letters reminding you about your repayment terms. The bank can tell you when the draw period will end, when your repayment term begins, and how much your first payment will be.

However, there may be an opportunity to transfer it to a fixed interest rate. While both HELOCs and home equity loans are secured by your home, a home equity loan typically has a fixed interest rate and fixed monthly payment, which can be easier to budget for.

It will give you predictable monthly payments so you can budget accordingly. However, a variable interest rate may be better for some borrowers. Balloon payments are larger, lump-sum payments that cover the remaining balance, so you may have to come up with thousands of dollars at once to eliminate your debt. Review your HELOC agreement and term disclosure documents to see if there are any prepayment or early closure fees. Consider setting up an emergency fund for when you can no longer use the HELOC to cover unexpected expenses , or trim some expenses from your monthly budget to prepare for that decrease in cash flow.

When the HELOC draw period ends, you will enter into the repayment period and make payments under the agreed-upon terms. However, you could use the following alternatives to save money or change your repayment schedule:. Unlike a home equity loan, the APR for a home equity line of credit does not take points and financing charges into consideration. The advertised APR for home equity credit lines is based on interest alone. Ask about the type of interest rates available for the home equity plan.

These rates may offer lower monthly payments at first, but during the rest of the repayment period, the payments may change — and may go up. Fixed interest rates, if available, at first may be slightly higher than variable rates, but the monthly payments are the same over the life of the credit line. Check the periodic cap — the limit on interest rate changes at one time.

Also, check the lifetime cap — the limit on interest rate changes throughout the loan term. Lenders use an index, like the prime rate, to determine how much to raise or lower interest rates.

Ask the lender which index is used and how much and how often it can change. Check the margin — an amount added to the index that determines the interest you are charged. In addition, ask whether you can convert your variable rate loan to a fixed rate some time later. Sometimes, lenders offer a temporarily discounted interest rate — a rate that is unusually low and lasts only for an introductory period, say six months. During this time, your monthly payments are lower, too. After the introductory period ends, however, your rate and payments increase to the true market level the index plus the margin.

When you take out a home equity line of credit, you pay for many of the same expenses as when you financed your original mortgage. These expenses can add substantially to the cost of your loan, especially if you ultimately borrow little from your credit line.

Try to negotiate with the lenders to see if they will pay for some of these expenses. In addition to upfront closing costs, some lenders require you to pay fees throughout the life of the loan.

These fees add to the overall cost of the loan. Find out how often and how much your payments can change. Ask whether you are paying back both principal and interest, or interest only. Even if you are paying back some principal, ask whether your monthly payments will cover the full amount borrowed or whether you will owe an additional payment of principal at the end of the loan.

In addition, you may want to ask about penalties for late payments and under what conditions the lender can consider you in default and demand immediate full payment. Ask whether you might owe a large balloon payment at the end of your loan term. When you take out the loan, ask about the conditions for renewal of the plan or for refinancing the unpaid balance. Consider asking the lender to agree ahead of time — in writing — to refinance any end-of-loan balance or extend your repayment time, if necessary.

One of the best protections you have is the Federal Truth in Lending Act. Under the law, lenders must tell you about the terms and costs of the loan plan when you get an application. If you want to sell your home and purchase another, then you would first need to close out the HELOC.

Ask us today if you qualify for cash out refinancing! Speak to an experienced Loan Advisor today by calling or completing our web form by visiting our Get Started page. Freedom Mortgage Corporation is not a financial advisor. The ideas outlined in this article are for informational purposes only, are not intended as investment or financial advice, and should not be construed as such.

Consult a financial advisor before making important personal financial decisions, and consult a tax advisor regarding tax implications and the deductibility of mortgage interest. And unlike credit cards, the interest you pay may be tax-deductible if you use the loan to buy, build or substantially improve the home that secures the loan. It's a good idea to consult your tax advisor regarding tax deductibility, as tax rules tend to change. Tip: While interest rates on home equity lines of credit are generally lower than credit card rates, remember the HELOC is secured by your home, and if you don't make your payments, you could lose your home.

Keep in mind that interest rates on HELOCs are generally variable, which means the rate may change at any time, though some banks offer a fixed-rate option for some or all of your balance. Your monthly payments would stay consistent and the interest rate wouldn't change, making it easier to incorporate the debt into your budget.

However, the fixed rate is often higher than the variable rate. Since the interest rate on your home equity line of credit may be lower than those of your other loans, you might consider using it to consolidate your debt. Doing so could help simplify your payments and reduce your interest costs. If you use a HELOC to consolidate debt, you may save on interest if you pay at least as much toward your new, lower-interest-rate loan each month as you paid toward the higher-rate debt.

The relative benefits of using a home equity line of credit for debt consolidation depend on individual circumstances. Tip: If you consolidate credit card debt using a home equity line of credit, you're turning unsecured debt into secured debt , so you want to be confident you can afford the payments.

Also, be careful not to run up new debt, such as on newly paid-off credit cards. If your children are heading to college—or if you're contemplating going back to school—a home equity line of credit can help you manage the costs. You could borrow money through your HELOC to make tuition payments when they're due and then pay the debt off over the set repayment period for your line of credit. Learn more about covering the cost of college.

While lower interest rates are usually preferable, it's a good idea to talk to a financial advisor about the best option for your situation. Expensive discretionary purchases, such as vacations or an extravagant wedding, are generally not the best reasons to draw on your home equity.

Be sure to carefully consider all of the options that might be available to you. Before you apply for a HELOC, learn as much as you can about them so you can make more informed choices on how to reach your financial goals.

The material provided on this website is for informational use only and is not intended for financial, tax or investment advice.

Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional and tax advisor when making decisions regarding your financial situation. We're here to help. Reach out by visiting our Contact page or schedule an appointment today.