Unless, of course, you live in a non-recourse state.

In non-recourse states, homeowners cannot be held personally liable for more than a forclosed property sells for. The debt is completely satisfied at the time of sale and lenders cannot sue to make up for lost funds. To learn more, take a look at this list of non-recourse states.

Keep in mind that laws change from time to time and that state code can be complicated to understand. If you’re facing foreclosure, consult with an attorney before making any decision based on potential recourse.

photo credit: respres

Foreclosures seem to be slowing, but the country still isn’t in the clear. If your home is in danger of facing foreclosure becuase of a HELOC in default, it’s important to have some idea of what the bank will do. Here are the five primary ways HELOC foreclosure situations play out:

1. The homeowner is given permission to offer a short-sale.
2. The homeowner is given permission to offer a short-sale because the primary mortgage holder offers a monetary incentive to the HELOC lender.
3. The primary lender forces a foreclosure.
4. The HELOC lender forces a foreclosure.
5. The HELOC lender purchases the primary loan.

Each of these five possibilities offers unique benefits and drawbacks to the homeowner. Take a look at the article HELOC Foreclosure to learn more about how to make the most of your situation in each possibility.

photo credit: stevendepolo

HELOC tax deductions could save you thousands when you file. To put it simply: If your HELOC was used to improve your home, you may deduct interest on lines up to $1 million ($500,000 married filing separately). If your HELOC used for other purposes, you may deduct interest on lines up to $100,000 ($50,000 married filing separately).

Although borrowing money in the form of a HELOC is riskier than taking out a traditional loan (i.e. your home must be used as collateral), the tax deduction is a huge incentive. Check out the article HELOC Taxes to learn more about how to qualify for some IRS relief.

photo credit: TheTruthAbout…

Borrowers dealing with undesirable changes from their credit card issuers may be able to mitigate some of these problems by transferring their debt to a HELOC.

Reuters explains:

“View your credit cards and other loans, such as a home equity line of credit (HELOC), as a portfolio of debt, just as you would consider all of your retirement accounts to be an investment portfolio. Make decisions based on the portfolio in its entirety. That may mean diversifying — setting aside one card for some uses and another for different uses. Or shifting balances from a high-interest rate card to a low-interest HELOC.”

Grouping all these lending products together as your “portfoilo of debt” is an excellent way to add some perspective to the situation. By considering your HELOC alongside your credit cards, you can easily compare interest rates, fees, and other features. Often, you’ll find that you can save hundreds or even thousands by transferring debt from a high-interest credit card to a low-interest HELOC.

See Also:

Is a HELOC Right for You?

New Jersey Business News explains:

“The closing costs for a home equity product are often substantially less than those associated with a first mortgage, giving it an advantage over a cash-out refinancing. Nationwide, the average origination and title fees on a $200,000 mortgage in 2009 totaled $2,732, according to Bankrate’s annual survey of mortgage closing costs…

If you have the room in your household budget for this additional loan payment, the HELOC or home equity loan saves money by funding the projects over a shorter time span than a cash-out first mortgage.”

The downside of a HELOC is that it is backed by your house. If you can’t make your payments for any reason, you could end up losing the roof over your head when the lender forecloses. So, make sure you have a plan in place for paying back the home equity loan and be aware of any balloon payments that will be due.

On the positive side, your HELOC interest may be tax deductible if the loan is used to improve your home. That can add up to significant savings especially when combined with a competitive rate.

See Also:

HELOC Tax Deductions

Columnist Steve Bucci pointed out both the pros and cons and said that the reader should weigh both sides. While it’s true that there are some benefits to using a HELOC as a car loan replacement, I’d like to point out that the drawbacks can be enormous.  Bucci writes:

” First, the loan is usually a variable interest rate loan that may change — as in go up — monthly. Second, if you don’t aggressively pay down the amount you borrow from the HELOC, that loan could outlive your car. This could result in you paying on the HELOC while having a new loan for your next vehicle. Additionally, adding the car loan amount to your line of credit balance decreases the amount of equity available in your home and could be a problem should you need to sell your home unexpectedly.”

Unlike a traditional car loan, your HELOC is secured by your home. HELOC debt is also much harder to discharge. Why put your property at risk in order to finance a car?

photo credit: dave_7

See Also:

Is a HELOC Right for You?

Banking My Way explains:

“…There is a serious problem — because HELOC rates are variable, you can’t be sure the savings will last. The loan that charges 4 percent today might charge 6, 7 or 8 percent sometime later.

Many HELOCS figure monthly adjustments by adding a fixed “margin” to the prime rate. With today’s prime at around 3.25 percent, a HELOC with a 3.5 percent margin would charge 6.75 percent. You’d probably do better refinancing with a fixed-rate mortgage at around 5 percent.”

When your HELOC rate adjusts (as it almost inevitably will), you may be faced with payments even greater than your current bills. Best bet: refinance if you need a lower rate. The HELOC simply wasn’t designed for this kind of maneuver.

See Also:

Is a HELOC Right for You?

WalletPop reports:

“That’s a possible step to take before you lose your job, but not after you’ve lost it. Why? You most likely won’t qualify if you don’t have a job, especially during these times when skittish lenders often aren’t lending to people who are still employed. And even if you do qualify, expect to be charged a whopping interest rate. Many financial experts say a HELOC is the last of the last resorts.”

Unfortunately, it’s often difficult to predict layoffs. However, many applicants are able to take out a home equity line of credit with few closing costs and let the line sit unused until trouble arises.

See Also:

Is a HELOC Right for Me?

If you’re one of the lucky few in this situation, don’t be too hasty to switch to a lower rate. Paying off your original home loan with a HELOC can be quite risky.

Jack Guttentag for Inman News Service explains:

“A reader with a HELOC who wrote me recently had a margin of minus 0.75 percent, which made her rate 2.5 percent. Her first mortgage had a rate of 6.5 percent, and her HELOC lender offered to increase her line by enough to pay off the first mortgage. The prospect of converting a 6.5 percent loan into a 2.5 percent loan was indeed enticing.

Nonetheless, I advised against it. The reason is that she did not expect to pay off the loan for 15 years, and over that long a period, the risk from the HELOC is too high.

The prime rate is extremely volatile. In 1980, it jumped from 13.5 percent to 21.5 percent in two months! This was an unusual episode, to be sure, but unusual episodes are becoming commonplace these days.”

By shortening your repayment period and converting a fixed rate to an adjustable rate, you’re opening yourself to the some serious potential problems.

See Also:

Answers to Common HELOC Questions

Is a HELOC Right for You?

A recent release on Fox Business explains:

“Reverse mortgages have become an increasingly important financial tool for people 62 and older who want to remain in their home and fund their retirement. And, with 78 million Baby Boomers approaching retirement, interest is expected to grow. Despite this, many Americans are still unclear about how reverse mortgages work and when they may be appropriate.

“A reverse mortgage is a loan secured by the value of a house, where no repayment of the loan is required until the borrowers permanently vacate the home,” explained Peter Bell, president of the non-profit National Reverse Mortgage Lenders Association. “Although historically, this has been of particular interest to those with limited sources of liquid income, these days, there are many new retirees considering a reverse mortgage as an option after looking at all the other assets they’ve accumulated. This tool can help a person avoid taking Social Security too early or defer taxable withdrawals from IRA or 401(k) balances.”

There’s no easy answer to this dilemma. Homeowners faced with deciding between a HELOC and reverse mortgage should consider their individual circumstances and consult a financial adviser if necessary.

See Also:

Is a HELOC Right for Me?

HELOC Q&A