A home equity loan is by nature a secured loan. A method to release the embedded equity in the home you own. An alternative expression is that homeowners use the equity in their home as collateral. Such loans are often taken out by homeowners that wish to either; finance home renovations, pay for unexpected expenses, pay for higher education or even to refinance your credit cards or fund that ideal holiday.

Essentially this loan creates a charge, or additional charge, against the home until it is repaid. If the borrower already had an existing mortgage then the Home Equity loan will be a second mortgage ranking behind the first mortgage for security purposes, hence the need for the lender to ensure that the borrower has sufficient equity in the home to cover their loan advance

Obviously there are conditions that borrowers must meet before they become eligible for a home equity loan. These loans were historically only available for homeowners that had substantial equity in their home, as well as a good credit history, however many banks and loan companies have become more aggressive pursuing profits in recent years and some have been advancing home equity loans to borrowers with less equity and with less than perfect credit rating credentials.

When a borrower gets into arrears on their home loan, they have missed a due payment and are technically deemed to be “In Default”. Whenever loan payments are in default, financiers charge penalty interest rates and also a loan default fee until the arrears are caught up.

Additionally if the situation continues, collections and legal costs and other penalty fees will also be levied against you, making it quite expensive for you to remain continually in arrears. Of course, eventually, the lender will foreclose on the mortgage and then you will have a whole other problem.

The key point is that it is best to catch up your arrears or refinance your debts as soon as you can in such situations, to minimise overall costs alone. Not to mention your peace of mind and stopping creditors from harassing you.