Does a Home Equity Loan Create a Lien Against Your Title?

Yes, so you have to be wise about whether you can afford to get one

A home is usually a valuable asset, and its prices tend to rise over time. Once you’ve built up a decent amount of home equity, your ownership stake can be used to get a nice big cash injection to spend on whatever you want, even another house.

This privilege does come at a cost, though. 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 put a lien on your property.

Key Takeaways

  • A home equity loan allows you to use the equity that you’ve built 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 that the lender has permission to foreclose on your home if you fail to keep up with repayments.
  • With the lien, the lender has a claim to something of value that it can seize and sell if necessary to recoup what it’s owed.
  • The lien remains in place until the debt is repaid.
  • If you are still paying off the mortgage on your home, the home equity loan becomes a second mortgage (also known as a second-lien debt or junior debt).

What Is a Lien?

A lien is a legal claim or a right against a property. Essentially, those in possession of a lien are permitted to sell the asset in question if an underlying obligation, such as the repayment of a loan, is not honored.

Liens are attached to some types of loans to protect the lender in the event that the borrower doesn’t meet their contractual obligations and keep up with payments. With the lien, the lender has a claim to something of value that it can seize and sell if necessary to recoup what it’s owed. In other words, when someone puts a lien on your property, it effectively becomes collateral for the debt.

These legal claims are typically public information, meaning that anyone can see if a creditor has a hold on a particular asset, and they remain in place until the debt is repaid. While the lien is in force, the borrower’s title over the property is legally not clear, and they technically don’t have complete ownership of it.

Liens can commonly be searched for online, as many government agencies now store public information digitally.

Does a Home Equity Loan Create a Lien Against Your Title?

Home equity loans enable 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 fail to keep up with repayments, then the lender can sell the home to recoup what it’s owed.

If you are still paying off the mortgage on your home, the home equity loan becomes a second mortgage (also known as a second-lien debt or junior debt). This means that in the event of nonpayment and the subsequent liquidation of the collateral, the original mortgage is first in line to collect. The second mortgage lender can only begin to retrieve its debt once the more senior lien has been honored and paid off.

This situation sometimes results in the lender also chasing down other assets that you own. If the proceeds from foreclosure aren’t enough to clear the debt, you may be hit with a deficiency judgment. This gives the lender permission to seize bank accounts, garnish wages, and place liens on other properties to retrieve the balance outstanding. With recourse loans, the creditor can go beyond liquidating the collateral to collect what it’s owed.

When there is a first mortgage, the second one will often carry higher interest rates, as its lien is subordinate and therefore less valuable.

Is a Lien Good or Bad?

Giving a lender a legal right to seize your home cannot be described as a good thing. It is necessary with a mortgage, though, and—believe it or not—actually can be beneficial if you don’t have any issues with paying back the money that you were lent.

When you offer your home as a guarantee, the loan becomes less risky to the lender. With the lien, the bank doesn’t need to worry so much about the borrower potentially defaulting, as it has another way to claw back its money. That lower risk translates into more attractive borrowing costs, expressed in the form of interest rates.

Loans with liens attached carry lower interest rates than unsecured debt.

It’s also worth remembering that a bank with a lien against your property can only seize the asset if you fail to fulfill your contractual obligations. If you keep up with payments and do as you promised, then the lien shouldn’t harm you or have any notable negative repercussions.

Problems occur when borrowers run into financial difficulties. If you lose your job or a key source of income and have little in the way of savings, that home equity loan that looked like such a great idea could then come back to bite you. Stop paying and the lender has the right to proceed with foreclosure, kicking you out of your house and leaving you homeless.

There’s also the risk that property values plummet and push you underwater, meaning that you owe more on the loan than the house is worth. Having a mortgage loan that exceeds the value of your home may sound unbelievable, but it has happened to many people and isn’t a good place to be.

What happens when you default on a home equity loan?

Home equity loans are secured loans, meaning that if you fail to keep up with repayments, the lender has the right to sell your house to collect what it’s owed.

What is the difference between a first mortgage and a second mortgage?

Plenty of people with a home equity loan are also still paying off the mortgage used to buy their house. When that’s the case, the home equity loan is structured as a second mortgage. The first mortgage takes priority over the second one when claiming the collateral. In other words, the new lender can only exercise its right to cash in on its lien once the first mortgage has been paid off.

Can you sell your house if you have a home equity loan?

You’re free to put your home up for sale without settling a home equity loan or other liens. However, if the sale goes through, you will need to use the proceeds to pay off the creditor holding the liens on your home’s title.

The Bottom Line

Home equity loans and their attached liens aren’t necessarily bad for homeowners. These guarantees make it cheaper to borrow money and won’t cause harm if the borrower honors the agreement.

Whenever you take out any loan, you must be aware that there will be repercussions if you don’t pay it back as agreed. With a home equity loan, it is your house that is at stake. That is why it is so important to fully understand the terms and repayment conditions before committing.

A home equity loan can be a great way to get a relatively cheap cash injection. But if you’re unable to keep up with the payments, it can also turn into a nightmare and leave you homeless.

Article Sources
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  1. Federal Reserve Economic Data (FRED), Federal Reserve Bank of St. Louis. “Median Sales Price of Houses Sold for the United States (MSPUS).”

  2. Internal Revenue Service. “What’s the Difference Between a Levy and a Lien?

  3. Nolo. “What Is a Property Lien?

  4. Ownerly. “Looking for Property Liens?

  5. Federal Trade Commission, Consumer Advice. “Home Equity Loans and Home Equity Lines of Credit.”

  6. Consumer Financial Protection Bureau. “What Is a Second Mortgage Loan or ‘Junior-Lien’?

  7. Cornell Law School, Legal Information Institute. “Deficiency Judgment.”

  8. Consumer Financial Protection Bureau. “Can a Debt Collector Garnish My Bank Account or My Wages?

  9., National Credit Union Administration. “Personal Loans: Secured vs. Unsecured.”

  10. Consumer Financial Protection Bureau. “What Is a Home Equity Loan?

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