Question: I live in New Jersey and have a 1st mortgage with GMAC and a HELOC secured by the property. My home is underwater. At present the 1st is covered, the HELOC is not, and it’s about $191,000.
The HELOC people have proposed reducing my interest rate from 6.25% to 4% which reduces my payment from about $1,017/mo to about $632/month. Seems like I should sign up, right?
Except I believe they want to convert the HELOC into a loan. So, the question is, does it matter for deficiency purposes whether I maintain the HELOC, or switch into a secured 2nd?
Answer: – First let me explain the difference between a HELOC and second mortgage. A HELOC or home equity line of credit is is a revolving line of credit that the homeowner can borrow from when needed up to the amount of the credit line. Similar to that of a credit card, the homeowner can pay off as much or as little as he or she wants. The homeowner then only pays interest on the amount borrowed regardless of how much can be borrowed on the home equity line of credit. At any time, the equity line can be paid off and then used again. The home is typically used as collateral for the loan because it is a type of 2nd mortgage.
A regular HEL or home equity loan is also a type of 2nd mortgage. The home is also used as collateral for the loan. The biggest difference here is that it’s a fully amortized fixed rate loan so you get the entire amount in one lump sum. The home equity line of credit typically, not always, has a variable interest rate and you start with a zero balance. You can draw upon it at anytime and its re-usable because it’s a credit line.
Both of them require you to “qualify” based on credit scores, income and the value of the home. It use to be extremely easy to get a HELOC. All you had to do is breathe. The days of “stated income, stated assets” are long gone and lending institutions have really cracked down on qualifications. Now, they don’t like to be in a 2nd position unless they are 80% LTV.
So, now that we know the difference between a HELOC and second mortgage, let’s answer your question. Since both a HELOC and HEL are 2nd mortgages both can initiate the foreclosure process even though they really don’t want to. Especially since you are so far upside down. This is why they are motivated to work with you in finding a solution. If that helps you out by lowering your monthly payment by almost $400, that seems like a win for you. If converted, you would give up the ability to borrow against it in the future if paid off.
One other thing to consider especially since you are upside down, would be to settle the note with them. This is where you would agree to pay them a specific amount upfront and in exchange they would pay off the note. GONE! You would eliminate the entire $1017/month. But in order to do this, you’d probably have to come up with 20% of the loan balance. This would be about $40K. We’ve seen them settle for a lot less then this, but this is kind of an average we are seeing.
If you don’t have the $40k, there are ways to get it. It’s a great option if you want to try can get your property back to where it’s not upside down anymore. Hope this helps and good luck.