What Happens if You Stop Paying Your Home Equity Loan?

The consequences could be quite unfavorable.

When you have a need to borrow money, there are different options you can explore. You might, for example, look into taking out a personal loan, which lets you borrow money for any purpose. But if your credit score isn't the best, a home equity loan could be a better choice.

A home equity loan lets you borrow against the equity you've built up in your home. And if you're not sure what that term means, worry not -- it's simply the difference between what your home could sell for and the balance you owe on your mortgage. So if the market value of your home is $300,000 and you owe $200,000 on your mortgage, you're left with $100,000 of home equity, which you can borrow against via a loan or line of credit.

It's often more advantageous to take out a home equity loan than a HELOC (home equity line of credit) because with the former, you'll get the benefit of a fixed interest rate on the sum you borrow. That could make your loan payments easier to manage.

But you might still reach the point where you're unable to repay your home equity loan. And that's where things could get really dicey.

A dangerous situation to land in

Any time you fail to repay a debt, it gets reported as delinquent to the credit bureaus. And once that information hits your credit report, your credit score has the potential to plummet. That could, in turn, make it more difficult to borrow money (or borrow affordably) when you need to.

But the consequences of not paying a home equity loan have the potential to be much more severe than that. Because that loan is secured by your home, if you don't repay it, your lender could technically force the sale of your home via foreclosure, thereby causing you to lose your home entirely.

To be clear, this generally will not happen after a couple of missed payments. But if you stop paying your home equity loan altogether, it's a possibility.

Be careful when taking out a home equity loan

A home equity loan might seem like an affordable way to borrow. But these days, borrowing rates are up across the board on the heels of recent Federal Reserve rate hikes. Between higher interest rates and closing costs, you may find that a home equity loan is more expensive than you bargained for. So be sure to proceed with caution if you're thinking of taking one out.

At the same time, if you have an existing home equity loan that you're struggling to repay, don't just ignore the problem. Instead, reach out to your lender, explain the situation, and see what options you have. You may be able to hit pause on your loan payments for a period of time or lower your monthly payments by stretching your repayment window.

Ultimately, your lender would most likely prefer to get repaid on its loan than to deal with the process of forcing your home into foreclosure. So there's a good chance your lender will work with you to come to a reasonable solution.