Equity Lines of Credit

By: Justin Lee

The way Americans have taken on mortgage debt has changed significantly in the past two decades. The 1980s saw second mortgages account for less than 4% of outstanding home mortgage debt. By the mid-1990s second mortgages had increased to 12% of home mortgage debt. The 2000s have shown yet another double-digit increase, and the number is only growing. The primary reason for this increase is the ease in which homeowners could access the equity in their homes. As a result second mortgage debt has grown faster than all other forms of consumer debt except credit card debt.

With a home-equity line of credit the homeowner signs a mortgage securing any money borrowed in the future under a line of credit from the lender. The homeowner may owe nothing the first day of the mortgage but will add to the amount with each charge made against it. Alternatively, the mortgage often finances old unsecured debts, so the mortgage begins by securing the previously unsecured debt load, with more to be added with future charges. In either case, any default on the loan may leave the homeowner suddenly having to avoid or stop foreclosure of the mortgage and possible sale of the home.

Homeowners who tap into their home equity may see themselves as clever by tapping into the riches represented by the equity in their homes. Lenders run television ads congratulating borrowers for their astuteness. Bankruptcy files are curiously devoid of borrowers who used this strategy with any success. Bankruptcy files are however filed with homeowners who took the risk and mismanaged their windfall.

By paying off debts with second mortgages, debtors might transfer otherwise dischargeable debts such as medical and credit card bills into debts they now have to pay at the risk of losing the family home to foreclosure.

The allure of easy money by tapping into a home's equity, coupled with poor money management is a leading cause in the rise of bankruptcy filings. Homeowners across the country are finding themselves unable to meet their financial obligations, placing themselves in a position where they are unable to prevent foreclosure on their homes. With no immediate answer on the horizon, this financial crisis will have far-reaching, negative effects for years to come.

Increasingly, these second and sometimes third mortgages, are contributing to the mortgage crisis in the United States and the rampant foreclosure filings occurring across the country. While the banking industry is tightening its lending practices - due to pressure from the government and international financial institutes the fall-out from this over borrowing is yet to be seen.

If homeowners are facing foreclosure due to taking out second and sometimes third or fourth mortgages, it is highly unlikely they will avoid a foreclosure without filing bankruptcy or working with a professional short sale expert to sell their home to an investor. Once a homeowner's equity decreases due to a downturn in the real estate market, it is very hard for the banks to recoup the losses of defaulted loans. Even the banks are going to see significant losses as the economy suffers through the current decline.

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