Can a HELOC Be Called Due? And What to Do If It Happens

A Home Equity Line of Credit (HELOC) allows homeowners to borrow against their property’s equity. It functions as a revolving line of credit, secured by the home. While offering financial flexibility, lenders retain the right to demand immediate repayment of the outstanding balance. This means a HELOC can be “called due” under certain circumstances.

Understanding HELOC Structure

A Home Equity Line of Credit is structured with distinct phases. The “draw period,” typically lasting 3 to 10 years, allows borrowers to withdraw funds up to an approved credit limit. During this phase, payments are often interest-only, offering lower monthly obligations.

Once the draw period concludes, the HELOC transitions into the “repayment period,” which can last for 10 to 20 years. In this phase, the ability to draw new funds ceases, and the borrower must begin making payments that include both principal and interest. This shift often results in significantly higher monthly payments.

HELOCs typically feature variable interest rates, meaning the Annual Percentage Rate (APR) can fluctuate based on a chosen index. As a secured loan, the borrower’s home equity serves as collateral, giving the lender a lien on the property. The credit limit is based on the available equity, which is the difference between the home’s market value and the outstanding mortgage balance.

Triggers for a HELOC Being Called Due

Specific conditions or clauses within a HELOC agreement can empower a lender to demand immediate repayment. A common trigger is a breach of contract or default by the borrower, including failing to make scheduled payments, maintain required property insurance, or pay other mortgages secured by the same property.

A significant decline in the home’s appraised value can also activate a “material adverse change” clause, allowing the lender to call the loan. If the value of the dwelling securing the HELOC falls significantly below its original appraised value, the lender’s security interest might be adversely affected. In such cases, the lender may reduce the credit limit or demand full repayment to protect their collateral.

Fraud or material misrepresentation by the borrower in connection with the HELOC agreement provides another ground for the lender to call the loan. This encompasses providing false information during the application process or subsequent interactions.

Selling the property that secures the HELOC is another situation that typically requires the outstanding balance to be paid off at closing. A HELOC acts as a lien against the home, and the property cannot transfer ownership with an active lien.

While less common for an immediate “call due” unless combined with other factors, significant negative changes to a borrower’s creditworthiness or financial circumstances could be a consideration. Lenders may review these changes if explicitly stated in the agreement, potentially leading to a freeze or reduction of the credit line. It is important to distinguish that reaching the end of the draw period itself does not typically mean the HELOC is “called due” for immediate full repayment; instead, it transitions to a repayment phase with higher principal and interest payments.

Responding to a HELOC Call

If a HELOC is called due, the lender typically provides formal written notification detailing the reason for the action and the required steps. Upon receiving such a notice, immediately contacting the lender is important to fully understand the situation and explore available options.

Borrowers may have several avenues to pursue when faced with a HELOC call. One option is to negotiate a repayment plan with the lender, potentially extending the term or adjusting payments to make them more manageable. Refinancing the outstanding HELOC balance into a new traditional mortgage or a personal loan, if eligible, could also be a solution. This would replace the callable HELOC with a different loan structure.

If the borrower is unable to negotiate a new plan or refinance, selling the property may become a necessary step to satisfy the debt. The proceeds from the sale would be used to pay off the HELOC and other liens on the home. Failure to repay the called loan can lead to severe repercussions, including the initiation of foreclosure proceedings by the lender, as the home serves as collateral for the debt.

Seeking professional advice from a financial advisor or housing counselor can provide guidance tailored to individual circumstances. These professionals can help assess the financial situation, understand the implications of the HELOC being called, and explore the most suitable strategies for resolution. They can also assist in communicating with the lender and navigating complex financial decisions.