Does a Home Equity Loan Create a Lien Against Your Title?

Yes, so you have to be wise about whether you can afford to get one

Fact checked by Vikki Velasquez
Reviewed by Doretha Clemon

Once you’ve built up a decent amount of home equity, you can tap into your ownership stake to get a cash injection via a home equity loan or home equity line of credit (HELOC).

However, when you take out a home equity loan, the lender places a lien on your home, making it collateral for the loan in case you don’t repay it. A lien allows the lender to repossess the home or asset in case of nonpayment on the loan.

Taking out a home equity loan can provide much-needed cash at better rates than an unsecured personal loan. However, be sure to understand how the financial institution will put a lien on your property.

Key Takeaways

• A home equity loan allows you to use the equity that you’ve built in your home as collateral to borrow a lump sum of cash. 
• The loan is secured by the property in the form of a lien, meaning that the lender has the right to foreclose on your home if you fail to make the payments.
• A lien allows a lender who has a claim on something as collateral to seize and sell the asset if necessary to recoup what it’s owed.
• The lien remains in place until the borrower has repaid the debt in full.
• If you are still paying off the first mortgage on your home, the home equity loan becomes a second mortgage—also called second-lien debt or junior debt.

What Is a Lien?

A lien is a legal claim or a right against a property. Essentially, those holding a lien can sell the asset in question if an underlying obligation, such as a loan repayment, is not fulfilled.

Liens are attached to certain types of loans to protect the mortgage lender in the event that the borrower fails to meet their contractual obligations and make timely payments. With the lien, the lender has a claim to collateral or something of value that it can seize and sell if necessary to recoup what it’s owed. In other words, when someone puts a lien on your property, it effectively becomes collateral for the debt.

These legal claims are typically public information, meaning that anyone can see if a creditor has a hold on a particular asset, and they remain in place until the borrower has paid the debt in full. While the lien is in force, the borrower’s title over the property is legally not clear, and they technically don’t have complete ownership of it.

Liens can often be searched for online, as many government agencies now store public information digitally.

Does a Home Equity Loan Create a Lien Against Your Title?

Home equity loans enable homeowners to use the equity in their home as collateral to borrow a lump sum of cash. The property secures the loan, so if you fail to keep up with repayments, the lender can sell the home to recoup the outstanding loan balance.

If you are still paying off the primary or first mortgage on your home, the home equity loan becomes a second mortgage—also known as a second-lien debt or junior debt. A first lien means that in the event of nonpayment and the subsequent liquidation of the collateral, the original mortgage is first in line to collect. The second mortgage lender can only begin to retrieve its debt once the more senior lien has been honored and paid off.

This situation sometimes results in the lender chasing down other assets that you own. If the proceeds from foreclosure aren’t enough to clear the debt, you may face a deficiency judgment, which permits the lender to seize bank accounts, garnish wages, and place liens on other properties to retrieve the outstanding balance. With recourse loans, the creditor can go beyond liquidating the collateral to collect what it’s owed.

Warning

When there’s a first mortgage, the second loan will often carry higher interest rates, as its lien is subordinate and, therefore, less valuable.

Is a Lien Good or Bad?

Giving a lender a legal right to seize your home cannot be described as a good thing. It is necessary with a mortgage, though, and—believe it or not—actually can be beneficial if you don’t have any issues paying back the money you were lent.

When you offer your home as a guarantee, the loan becomes less risky to the lender. With the lien, the bank doesn’t need to worry as much about the borrower potentially defaulting, as it has another way to claw back its money. That lower risk translates into more attractive borrowing costs, expressed in the form of interest rates.

Important

Loans with liens attached carry lower interest rates than unsecured debt.

It’s also worth remembering that a bank with a lien against your property can only seize the asset if you fail to fulfill your contractual obligations. If you keep up with payments and do as you promised, the lien shouldn’t harm you or have any notable negative repercussions.

Problems can occur when borrowers run into financial difficulties. If you lose your job or a key source of income and have little in the way of savings, you might struggle to pay the first and second mortgage or home equity loan. If you default or stop paying, the lender can proceed with foreclosure, whereby the house gets repossessed and sold to recoup the loan balances.

There’s also the risk that property values plummet and push you underwater, meaning you owe more on the loan than the value of the house. If you lose your job or face a reduction in income and can’t make the payments, you could take a loss when selling your home with an underwater mortgage.

What Happens When You Default on a Home Equity Loan?

Home equity loans are secured loans, meaning that if you fail to keep up with repayments, the lender has the right to sell your house to collect what it’s owed.

What Is the Difference Between a First Mortgage and a Second Mortgage?

If you take out a home equity loan while you’re still paying off the mortgage used to buy your house, the home equity loan becomes a second mortgage. The first mortgage takes priority over the second one when claiming the collateral. In other words, the new lender can only exercise its right to cash in on its lien once the first mortgage has been paid off.

Can You Sell Your House if You Have a Home Equity Loan?

You’re free to put your home up for sale without settling a home equity loan or other liens. However, if the sale goes through, you must use the proceeds to pay off the creditor holding the liens on your home’s title.

The Bottom Line

Home equity loans generate an attached lien on your property so the lender has collateral for the loan. Although a lien represents a legal claim to your property if you default on the payments, it can also increase your odds of getting approved for the loan and at a lower interest rate than unsecured debt.

A home equity loan can be a great way to tap into your home equity for a cash injection. However, be aware that you will face repercussions if you don’t repay it as agreed. With a home equity loan, your house is at stake. Please consult a financial professional and review the terms and repayment conditions before committing.