A modification to your home equity line of credit (HELOC) is a possible solution when you can’t meet your HELOC payments. The goal is to change your borrowing terms in order to make payments more affordable.
It’s important to weigh all of your options when you can’t afford to pay back your HELOC, since this type of financing is secured by your home. Falling behind on your payments can put your house at risk of foreclosure. By facing the challenge and working with your lender, you may be able to lower your stress level and protect your investment in your home.
Key Points
• There are typically three HELOC terms that may be modified.
• Lenders usually have strict eligibility criteria for modifications, including proof of financial hardship.
• Expect the approval process to take up to 30 days.
• Credit scores may drop between 30 and 100 points after a HELOC modification.
• Consider alternatives before making a decision.
Understanding HELOC Modifications
A HELOC modification is when a borrower asks their lender for a change in their payment terms. There are many reasons to consider modifying your HELOC, especially if you experience a major life event that impacts your finances. For instance, the death of a spouse, a medical event, or a job loss are common issues that cause a sudden change in financial capabilities.
There are three types of modifications: changes to your interest rate or loan term, or converting your HELOC to a fixed-rate home equity loan. Just remember that anytime you extend your loan term, you’ll pay more interest over time, even if your monthly payments are lower. (Need a refresher on how HELOCs work? Read up on understanding a home equity line of credit.)
Common HELOC Modification Options
Can you modify a HELOC loan? Yes, but there are a few different ways you can do it.
Interest Rate Adjustments
It’s possible to request a reduction in your interest rate to help lower your overall HELOC payment. If you have a variable rate, you could also request switching to a fixed rate as part of your modification. This keeps your future payments stable so you know exactly how much of your money is going to both principal and interest each month.
The downside, of course, is that requesting an interest rate adjustment doesn’t mean you’ll get approved. Your lender can deny your request and may prefer the next option for a HELOC modification.
Extending the Draw Period
Another way to modify your HELOC is to extend the draw period. This gives you more time to recover from your financial hardship before you have to start the full repayment period when your HELOC payments are likely to jump even higher. Your lender may be more open to this type of modification because you’ll pay more interest over time.
Converting to a Fixed-Rate Loan
Converting to a fixed-rate loan takes away the volatility of variable interest rates. With a variable rate, your payment can change every month, making it hard to predict how much you need to budget for your HELOC payments.
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Eligibility for HELOC Modification
The eligibility requirements for a HELOC modification vary by lender. But there are a few standard qualifications that you’ll likely encounter:
• Proof of financial hardship
• Account has been open a for a minimum period of time
• You’ve already made some payments
• You haven’t exceeded the lender’s modification limits
Reach out to your lender as soon as possible when you realize you can’t keep up with your HELOC payments, whether you’re in the draw period or the repayment period.
HELOC Modification Process
What happens when you start the HELOC modification process? First, be realistic with your expectations for getting a solution in place. Each lender has its own approval timeline, which can take up to a month.
Before reaching out to your lender, prepare by gathering the following documentation:
• HELOC loan number
• Monthly pretax income details
• Monthly household expenses
• Details on the reason for your financial hardship
Also note that you may have a trial period before finalizing the HELOC modification. This gives your lender assurance that you can make your new payments. If you pay the new amount on time, then you’ll likely receive a new loan contract after a few months.
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Impact of HELOC Modification on Your Finances
A HELOC modification can hurt your credit score because it will be reported to the credit bureaus. Depending on your credit score, having a loan modification added to your credit report could cause your score to drop between 30 and 100 points. The higher your score, the bigger impact it’s likely to cause.
Another likely drawback is that you won’t be able to tap into your home equity after modifying a HELOC. You also probably won’t have options for increasing your HELOC limit in the future.
Can you increase a HELOC limit while applying for a modification to your existing terms? Again, probably not since the goal is to make your payments more affordable.
Despite these drawbacks, a loan modification is still a better outcome than going through foreclosure, which causes you to lose possession of your home.
Alternatives to HELOC Modification
There are a few options to think about before modifying your HELOC:
• Refinance: You could get a lower interest rate or extend your overall payments to a longer time frame by doing a cash-out refinance. If you still have equity in your home, you could get a new mortgage at a higher amount, use the cash-out funds to pay off the HELOC, and start making a single mortgage payment with the larger balance. The downside is that it may be difficult to qualify for a cash-out refinance if you’re already experiencing a period of financial hardship. A home equity loan calculator can help you see how much you might be able to borrow against your home.
• Convert to a home equity loan: Some lenders allow you to convert your HELOC to a home equity loan, especially when you’re in your draw period and nearing the repayment period.
• Sell your home: If you calculate your home equity and think the value exceeds your mortgage and your HELOC balances, you could consider selling your home. Check with your HELOC lender and make sure you wouldn’t be required to pay off your balance before listing your home. Also make sure you have a sound plan in place for your next move.
The Takeaway
Getting a loan modification for your HELOC comes with some drawbacks, but the biggest benefit is helping you stay in your home. If you’ve experienced a major financial hardship and can no longer afford your HELOC payments, talk to your lender as soon as possible.
You can also explore your options with other lenders. A cash-out refinance or a new home equity loan are other possible solutions. Keep making payments on your current HELOC while you consider your options.
FAQ
How often can I modify my HELOC?
Each financial institution has its own schedule of how frequently you can request a HELOC modification. Some limit modifications to once or twice in the past 12 months, or twice in a five-year period.
Will modifying my HELOC affect my credit score?
Yes, lenders report HELOC modifications to the credit bureaus. Expect your credit score to drop between 30 and 100 points once the modification is finalized and reported. Your score will recover over time, but the modification itself will stay listed on your credit report for seven years.
Can I modify a HELOC during the repayment period?
Yes, you can modify your HELOC during the repayment period. You may be able to change your rate from a variable to fixed APR or even convert it to an installment loan.
Photo credit: iStock/nensuria
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