A debtor blogging on a bankruptcy forum website recently asked these questions about her home equity line of credit, or HELOC for short: “I just realized our house payment is a HELOC and not a mortgage payment. Will this make a difference in taking us out of a Chapter 7 and into a Chapter 13? Will this appear to the bankruptcy trustee as having equity in our home due to it not being a mortgage?”
The immediate answer to the bloggers question is “NO.” A HELOC is a secured debt just like a primary mortgage is, but there are differences in a HELOC and a primary mortgage most debtors need to understand before obtaining them or filing for bankruptcy protection.
Difference by Definitions
A HELOC is a home equity line of credit where a loan is extended to an borrower for a line of credit for some maximum draw, usually occurring within some period of stated time. The pay back is period is also stated for a period of time, and the interest rates are governed like an ARM loan that is tied to the prime interest rate. The interest rates can fluctuate during the loan period.
A primary mortgage loan is a loan extended to a borrower for a specific fixed dollar amount. The pay back time is specific and can either include variable or fixed interest rates over multiple lengths of time.
Both HELOC and primary mortgage loans require placing a collateral lien on property for the availability of the money.
A HELOC does not become a fixed amount borrowed until the borrower actually uses the money available, and then it becomes similar in ways to a secured mortgage loan that is guaranteed by property. A HELOC can be the primary or a secondary loan backed by collateral of property.
A primary mortgage loan is always confirmed by using some institution or other to close on the mortgage loan contract and secure good title. Most HELOCs are confirmed by contract and signatures on documents that have the legal authority to be attached as liens on property through recording the documents in county court records.
Advantages and Risks of Each
HELOCs are convenient for providing funds for temporary and intermittent needs. They can be used for paying off credit cards, paying college tuition, or for making home improvements. You can draw and pay back the loans for the money you use, and the availability for more is there as long as you have the maximum draw in place. The upfront cost is low because there is no closing costs.
A major risk of the HELOC is exposure to interest fluctuations. Other risks include the maximum draw can be changed at any given point by the lender canceling the availability of funds.
Some primary mortgage loan advantages are the availability of lower interest rates over a pro longed life of a loan, and the lender usually provides a service of escrow along with taking care of the basic needs of financing a home.
The major risk for primary mortgage loans is variable arms interest rates.
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