Unfortunately, a home equity loan can block a deed in lieu of foreclosure, as the second lender has rights, too.
A homeowner who has kept up with payments but wants to prepare for the worst could have it both ways by taking out a home equity line of credit rather than a home equity installment loan. Typically, an installment loan is a lump sum received soon after the loan is approved. Payments begin almost immediately, and the obligation could thus hinder a deed in lieu of foreclosure if the homeowner’s situation worsens.
A home equity line of credit, or HELOC, works like a credit card. Once approved, the homeowner has the right to borrow up to the limit. Payments, of course, don’t begin until you start using the credit line. A line of credit can serve well as an emergency reserve. Use the search tool to find a good home equity loan. Many HELOCs charge less than 4%, while installment loans charge more than 8%, according to the BankingMyWay.com survey.
A homeowner who runs into financial trouble and has a HELOC can choose to tap the line of credit to get over the rough spot, or cancel the credit line and pursue the deed in lieu of foreclosure. In a crisis, the more options the better.
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