Can a Home Equity Loan Be Called? Understanding Your Rights and Risks

Yes, a home equity loan can be called by the lender, requiring immediate repayment of the outstanding balance. This action can be triggered by scenarios such as default on payments, a significant drop in property value, or violation of loan terms. If unpaid, this could lead to foreclosure and negatively impact the borrower’s credit score.

A home equity loan allows homeowners to leverage the equity in their home to access funds for major expenses or projects. Also known as a second mortgage, these loans use your home as collateral and allow you to borrow against the equity – the difference between your home’s current market value and what you still owe on your existing mortgage. 

While home equity loans provide funds when you need them, there is always a risk the lender can “call” the loan – requiring you to repay the outstanding balance immediately. This can happen even if you have diligently made all your monthly payments. Understanding what it means when a home equity loan is called, and knowing your rights and options should this occur, is crucial for all borrowers.

What Does It Mean When a Home Equity Loan Is Called?

When a lender “calls” a home equity loan, they are demanding full repayment of the outstanding loan balance. This means you must come up with the remaining principal, interest, and any fees right away. The lender does this by invoking the loan’s “call provision” or “call feature”. 

This provision gives the lender the option to call the home equity loan due and payable in full after a certain number of years or under certain circumstances. When called, the loan’s maturity date effectively accelerates from months or years in the future to immediately.

Why Would a Lender Call a Home Equity Loan?

There are a few scenarios where a lender may decide to call in a home equity loan, including:

1. Default on Payments

If you miss or are late on your monthly home equity loan payments, the lender can call the loan. Even a single late or missed payment can trigger the call provision if specified in your loan agreement.

2. Drop in Property Value

If the value of your home drops significantly, this reduces the amount of accessible equity and increases the lender’s risk on the loan. The lender may call the loan to minimize potential losses if your property value declines.

3. Violation of Loan Terms

Failure to adhere to any terms in your loan agreement gives the lender the right to demand full repayment. For example, if you use the property for ineligible purposes or rent it out without permission, the lender could call the loan.

What Are the Consequences of Having Your Home Equity Loan Called?

The most serious repercussion of having your home equity loan called is the lender can begin foreclosure proceedings if you cannot repay the balance within their specified timeframe. They hold your home as collateral and failure to pay gives them the right to seize and sell your property to recover their money.

Your credit score will also plummet if the called home equity loan goes into default, making future borrowing very difficult. You may also face collection calls, lawsuits, wage garnishment, and liens placed on your other assets in the lender’s effort to get repaid.

How Can You Prevent Your Home Equity Loan from Being Called?

To avoid having your home equity loan called, be sure to:

• Make payments on time – Consider setting up automatic payments. Even a single late payment could trigger a call.
• Adhere to all loan terms – Don’t default on any provisions in your loan agreement.
• Maintain your home’s value – Upgrade and maintain your property so its value remains steady or appreciates.
• Build emergency savings – Have cash reserves to draw from if you face hardship making payments temporarily. 
• Refinance before the call date – Consider refinancing to a fixed rate loan without a call feature if you near the loan’s call date.

What to Do If Your Home Equity Loan Is Called?

If you receive a notice from your lender that your home equity loan has been called, you should:

• Contact your lender immediately – Open communication gives you the best chance of negotiating alternate repayment arrangements.
• Review the loan terms – Verify the lender is entitled to call the loan at this time and understand their requirements.
• Assess your repayment options – Can you sell assets, dip into savings, or borrow to settle the balance? 
• Seek professional guidance – Talk to a housing counselor or consumer lawyer to understand your rights.
• Negotiate where possible – If you can’t pay in full, try negotiating a repayment plan or loan modification with the lender.
• Consider bankruptcy – Filing for Chapter 13 bankruptcy stops foreclosure proceedings and can eliminate or restructure the debt.

Understanding the Fine Print: Call Provisions in Home Equity Loans

The call provision giving lenders the option to accelerate payment on a home equity loan can vary:

• Timeframe – Most lenders can call a loan after 5-15 years. Check your loan terms.
• Requirements – The lender may or may not need a specific reason to invoke the call feature. 
• Notice – 30-60 days written notice is typical before the loan balance is due.
• Options – The borrower may have the right to refinance with the same lender when called.

As the borrower, be sure to read and understand the fine print of your loan’s call provision before signing. Never assume you’ll have the full 15 or 30 year term to repay.

How to Negotiate with Your Lender If Your Home Equity Loan Is Called

If your lender calls your home equity loan, negotiating an alternative to immediate repayment of the entire balance is wise. Be proactive and contact your lender as soon as possible after receiving a call notice. You can negotiate by:

• Asking for Reason – Request an explanation for why they called the loan to see if any circumstance can be remedied.
• Showing Good Faith – Demonstrate you wish to repay by making a partial payment or catching up on late payments. 
• Offering Collateral – Pledge other assets like investments or a car as additional security.
• Proposing a Repayment Plan – Suggest smaller payments over 12-24 months to gradually pay off the balance.
• Requesting Loan Modification – Ask them to modify the loan’s term or interest rate to make repayment easier.
• Filing for Bankruptcy – Use Chapter 13 bankruptcy to legally negotiate alternate repayment of debt.

Polite persistence and creative problem solving are key to negotiating with lenders. Having a mortgage or housing counselor assist you can also help achieve a mutual agreement.

Legal Rights and Protections for Borrowers Whose Home Equity Loans Have Been Called

If negotiating does not produce satisfactory results and foreclosure seems imminent after your home equity loan is called, borrowers have options:

• Loan Auditing – Have a professional audit your loan documents to find any violations of lending laws by the lender, which you can use as leverage.
• Fair Debt Collection Practices Act – Federal law prohibits harassing or abusive debt collection practices you can report. 
• FHA Guidelines – If a government-backed FHA loan, lender must follow guidelines like attempting loan modifications first.
• Bankruptcy – Filing Chapter 13 bankruptcy halts foreclosure so you keep your home as you repay debt through a court-ordered plan.
• Redemption Periods – State laws give you time (often 6-12 months) to buy back your foreclosed home by repaying the mortgage balance in full. 
• Right of Reinstatement – Some states give you the right to stop foreclosure and reinstate the mortgage by becoming current on payments all at once.

Alternatives to Home Equity Loans That Can’t Be Called

If you need funds but want to avoid risks associated with home equity loans, options include:

• HELOCs – Home Equity Lines of Credit don’t have a call feature so the balance can’t abruptly come due.
• Cash-Out Refinance – Refinancing your mortgage lets you tap equity while the loan itself can’t be called. 
• Personal Loans – Unsecured bank loans don’t put your property at risk although have higher rates. 
• Retirement Funds – Withdrawing or borrowing against 401k/IRA funds avoids the need for a home equity loan entirely.
• Family Loans – Borrowing from a family member may provide flexible terms and only put your relationship at stake.
• Credit Cards – Credit card cash advances or balance transfers could be cheaper short-term options than home equity loan costs and risks if promptly repaid.

Conclusion

A called home equity loan can quickly become a financial nightmare for borrowers who fail to repay the balance. Avoid this outcome by understanding lenders’ rights, taking preventive measures, negotiating effectively, and knowing your legal protections. With prudent planning, you can benefit from your home equity without the risk of a devastating call.

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