Does a Home Equity Loan Create a Lien Against Your Title?
A home is typically a valuable commodity that tends to increase in price over time. Once you’ve built up a reasonable amount of home equity, your ownership interest can be used to get a nice big injection of cash to spend on whatever you want.
However, this privilege comes at a cost. In exchange for lending you large sums of money at generally better rates than you would get on an unsecured personal loan, the financial institution will mortgage your property.
The central theses
- With a home equity loan, you can use the equity you’ve built up in your home as collateral to borrow a lump sum of cash.
- The loan is secured by the property in the form of a lien, meaning the lender has permission to mortgage your home if you fail to keep up with the repayments.
- With the lien, the lender has a claim to something of value that they can confiscate and sell if necessary to recover their debt.
- The right of lien remains in effect until the debt has been repaid.
- If you’re still paying off the mortgage on your home, the home equity loan becomes a second mortgage (also known as a “secondary debt” or “subordinated debt”).
What is a lien?
A lien is a title or right over property. In principle, lien holders are permitted to sell the asset in question if an underlying obligation, such as B. the repayment of a loan, is not fulfilled.
Liens are attached to some types of loans to protect the lender in case the borrower defaults on their contractual obligations and fails to keep up with payments. With the lien, the lender has a claim to something of value that they can confiscate and sell if necessary to recover their debt. In other words, when someone mortgages your property, it effectively becomes collateral for the debt.
These legal claims are typically public information, meaning anyone can see whether a creditor holds a particular asset, and they remain in place until the debt is repaid. While the lien is in effect, the borrower’s ownership of the property is not legally clear, and he does not technically have full ownership of it.
Liens can commonly be searched online as many government agencies now store public information digitally.
Does a Home Equity Loan Create a Lien Against Your Title?
Home equity loans allow homeowners to use the equity in their home as collateral to borrow a lump sum of cash. The loan is secured by the property. So if you don’t keep up with the repayments, the lender can sell the home to pay off the debt.
If you’re still paying off the mortgage on your home, the home equity loan becomes a second mortgage (also known as a “secondary debt” or “subordinated debt”). This means that in the event of non-payment and subsequent realization of the collateral, the original mortgage must be collected first. The second mortgage lender cannot begin collecting their debt until the primary lien is discharged and paid off.
This situation sometimes leads to the lender chasing after other assets you own as well. If the foreclosure proceeds are insufficient to pay off the debt, you may face a default judgment, which gives the lender permission to seize bank accounts, garnish wages, and place liens on other properties to call off the outstanding balance . With subrogated loans, the creditor can go beyond realizing the security to collect the amounts owed.
With a first mortgage, the second often pays higher interest because your lien is subordinate and therefore less valuable.
Is a lien good or bad?
Giving a lender a legal right to foreclose on your home cannot be called a good thing. However, it is necessary with a mortgage and, believe it or not, can actually be beneficial if you have no trouble paying back the money you borrowed.
Offering your home as a surety makes the loan less risky for the lender. With the lien, the bank doesn’t have to worry as much about a possible default by the borrower because they have another way to get their money back. This lower risk translates into more attractive borrowing costs, expressed in terms of interest rates.
Loans with attached liens have lower interest rates than unsecured debt.
Also remember that a bank with a lien on your property can only seize the asset if you fail to meet your contractual obligations. If you keep up with the payments and do what you promised, the lien shouldn’t hurt you or have any significant negative impact.
Problems arise when borrowers face financial difficulties. If you lose your job or a major source of income and have little savings, that home equity loan that looked like such a great idea could come back to bite you. Stop paying and the lender has the right to proceed with foreclosure, evicting you from your home and leaving you homeless.
There’s also a risk that the property’s value could plummet, pushing you “under water,” meaning you’re in more debt than the home is worth. Having a mortgage loan that exceeds the value of your home may sound incredible, but it’s happened to a lot of people, and it’s not a good place to be.
What happens when you default on a home equity loan?
Home equity loans are secured loans, meaning the lender has the right to sell your home to collect the debt if you fail to keep up with the repayments.
What is the difference between a first mortgage and a second mortgage?
Many people with a home equity loan are also still paying off the mortgage that bought their home. In this case, the home equity loan is designed as a second mortgage. The first mortgage takes precedence over the second in claiming the collateral. In other words, the new lender cannot exercise their lien until the first mortgage is paid off.
Can You Sell Your Home If You Have a Home Equity Loan?
You are free to list your home for sale without paying off a home equity loan or other lien. However, if the sale goes through, you must pay the lender holding the liens on your home title with the proceeds.
The final result
Home equity loans and the liens that come with them aren’t necessarily bad for homeowners. These guarantees make it cheaper to borrow money and do no harm if the borrower honors the agreement.
When you take out a loan, you need to be aware that there are consequences if you don’t pay it back as agreed. With a home equity loan, your home is at stake, which is why it’s so important to fully understand the terms and repayment terms before committing.
A home equity loan can be a great way to get a relatively cheap injection of cash. But failing to keep up with payments can also become a nightmare and leave you homeless.