A ‘lien’ can seem like one of the scarier words, and concepts, in the financial world, but what is a property lien exactly? Chances are, that’s not the only question you have about liens. You likely also want to know how a lien works, whether it’s something you need to worry about when borrowing, if it will impact your credit, and finally, how a lien works when accessing your home equity through a HELOC. Here’s everything you should know about liens.
In This Article
What Is a Property Lien?
Simply put, a property lien is collateral. And this collateral is used to borrow money. The most common type of property lien is a mortgage, which is when a lender places a lien on your home. This property lien serves as the collateral for the money you’ve borrowed to buy the home. When a lien is placed on your property, usually by a lender, it becomes an official public record that’s filed in your county’s records office saying you owe money to a creditor. As The Balance states, “You rarely notice [liens] when things are going well because they help with home loans, auto loans, and other parts of your life.”
It’s important to note that property liens aren’t scary at all, providing you consistently pay your debt on time and in full per the terms of the loan.
What You Should Know About Liens When Opening A HELOC
You own a home now, and make your mortgage payments on time every month, you probably don’t think about the property lien against your home. But now you’d like to renovate the house, build an addition or have a new fence for your backyard because you’re getting a dog.
Whatever you want to do with the money, you may be able to access the equity you’ve built up in your home with a home equity line of credit (also known as a HELOC). While the original mortgage company still has their lien on your property, when you open a HELOC, a second lien will be used by the new lender to secure the money they will be lending you to do the repairs, renovations and additions you have planned.
Does a Property Lien Impact Your Credit Report?
Now that you know what a property lien is, the next question to answer is, “Will a lien impact my credit?” While some liens (statutory and judgemental liens) could be a black mark on your credit for years, HELOC liens and property liens placed as a result of mortgage loans are considered consensual because you enter into these lien arrangements voluntarily in order to gain a benefit (borrowing money).
This means that HELOC liens will appear on your credit report but there is not a negative impact to your credit score, as long as you make your home equity line of credit payments on time and fulfill the terms of the loan agreement. Additionally, throughout the HELOC, while the property lien is on your home, you continue to retain ownership and control over your property.