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Lien times: The HELOC is back

Paddy Hirsch Nov 25, 2013

If you’ve ever taken out a loan, whether to buy a car or a house or a new PlayStation, you’ve probably heard the term lien. “I’m putting a lien on your house,” for instance.

That’s pretty standard: The bank who lends you the money puts a lien on your property. Fail to make those payments, and the bank gets the house or the car, or whatever.

But what about a second lien? It’s pretty apparent, right? A second loan on the same property.

The rules for a second lien are similar to the first, and the net effect is the same: Fail to make a payment on the loan, and the lender can legally force the sale of the house, to get their money back. The only difference is that the second-lien lender has to wait in line: The main mortgage lender gets paid in full first, and only then will the second-lien lender get refunded.

In the U.S., second-lien loans on homes usually come in the form of a home equity line of credit, or HELOCs. If you recall, the HELOC was a key player in the financial crisis.

As home prices kept increasing, many Americans borrowed against their homes. But when the value of the property fell, they found themselves underwater on their mortgages: Owing more than the house was worth.

Small wonder that HELOCs fell out of favor over the last five years: Homeowners were scared of them, and lenders didn’t like that they risked not getting the full amount of their loans back as property values fell.

But now, it seems, the HELOC is back. Bloomberg News reports that HELOC originations could rise 16 percent this year and reach another five-year high in 2014.

Home prices are rising, and real estate watchers like Zillow reckon the number of underwater homeowners is falling sharply. Americans are once again taking advantage of rising real estate prices to pull money out of their homes.

We can hope that this time they’re doing it to renovate (as opposed to buying a jet ski), but the risks remain the same.

That HELOC may not seem like a lot of money compared the main mortgage, but fall behind on payments, and you’re in danger of losing the whole enchilada.

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