Home Equity Loan Tips

Do you own your home? If so, it’s likely to be your greatest single asset. Unfortunately, if you agree to a loan that’s based on the equity you have in your home; you may be putting your most valuable assets in jeapordy. Homeowners particularly elderly, minority, and those with fixed incomes or bad credit, should be careful when borrowing money based on their home equity. Why? Certain abusive or exploitative lenders target these borrowers who unwittingly may be putting their home on the line.

Abusive lending practices range from equity stripping and loan flipping to hiding loan terms and packing a loan with extra charges. The Federal Trade Commission (FTC) urges you to be aware of these loan practices to avoid losing your home:

You need money. You don’t have much income coming in each month. You have built up equity in your home. A lender tells you that you could get a loan, or an equity line of credit, even though you know your income is just not enough to keep up with the monthly payments. The lender encourages you to pad your income on your application form to help get the loan approved. This lender may be out to steal the equity you have built up in your home. The lender doesn’t care if you can’t keep up with the monthly payments. As soon as you don’t, the lender will foreclose, taking your home and stripping you of the equity you have spent years building. If you take out a loan but don’t have enough income to make the monthly payments, you are being set up, and you will probably lose your home.

You’ve fallen behind in your mortgage payments and may face foreclosure. Another lender offers to save you from foreclosure by refinancing your mortgage and lowering your monthly payments. Look carefully at the loan terms. The payments may be lower because the lender is offering a loan on which you repay only the interest each month. At the end of the loan term, the principal is due. That is, the entire amount that you borrowed is due in one lump sum called a balloon payment. If you can’t make the balloon payment or refinance, you face foreclosure and the loss of your home. For more information on Balloon Mortages go here.

Suppose you’ve had your mortgage for years. The interest rate is low and the monthly payments fit nicely into your budget, but you could use some extra money. A lender calls to talk about refinancing, and using the availability of extra cash as bait, claims it’s time the equity in your home started working for you. You agree to refinance your loan. After you’ve made a few payments on the loan, the lender calls to offer you a bigger loan for, say a vacation. If you accept the offer, the lender refinances your original loan and then lends you additional money. In this practice, often called loan flipping, the lender charges you higher points and fees each time you refinance, and may increase your interest rate as well. If the loan has a prepayment penalty, you will have to pay that penalty each time you take out a new home loan. You now have some extra cash and a lot more debt, stretched out over a longer term. The extra` cash you receive may be less than the additional costs and fees you were charged for the home loan refinancing. And what’s worse, you are now paying interest on those extra fees charged in each refinancing. Long story short? With each refinancing, you’ve increased your debt and probably are paying a very high price for some extra cash. After a while, if you get in over your head and can’t pay, you could lose your home.

A contractor calls or knocks on your door and offers to install a new roof or remodel your kitchen at a price that sounds reasonable. You tell him you’re interested, but can’t afford it. He tells you it’s no problem. He can arrange financing through a lender he knows.You agree to the project, and the contractor begins work. At some point after the contractor begins, you are asked to sign a lot of papers. The papers may be blank or the lender rushes you to sign before you have time to read what you’ve been given. The contractor threatens to leave the work on your house unfinished if you don’t sign. You sign the papers. Only later, you realize that the papers you signed are a home equity loan. The interest rate, points and fees seem very high. To make matters worse, the work on your home isn’t done right or hasn’t been completed, and the contractor, who may have been paid by the lender, has little interest in completing the work to your satisfaction. Not to knock all home contractors, but when you need a home improvement loan or constrution loan, you should set this up yourself not the contractor.

You’ve just agreed to a mortgage on terms you think you can afford. At closing, the lender gives you papers to sign that include charges for credit insurance or other benefits that you did not ask for and do not want. The lender hopes you don’t notice this, and that you just sign loan papers where you are asked to sign. The lender doesn’t explain exactly how much extra money this will cost you each month on your loan. If you do notice, you’re afraid that if you ask questions or object, you might not get the loan. The lender may tell you that this insurance comes with the loan, making you think that it comes at no additional cost. Or, if you object, the lender may even tell you that if you want the loan without the insurance, the loan papers will have to be rewritten, that it could take several days, and that the manager may reconsider the loan altogether. If you agree to buy the insurance, you really are paying extra for the loan by buying a product you may not want or need.

After you get a mortgage, you receive a letter from your lender saying that your monthly payments will be higher than you expected. The lender says that your payments include escrow for taxes and insurance even though you arranged to pay those items yourself with the lender’s okay. Later, a message from the lender says you are being charged late fees, but you know your payments were on time. Or, you may receive a message saying that you failed to maintain required property insurance and the lender is buying more costly insurance at your expense. Other charges that you don’t understand, like legal fees, are added to the amount you owe increasing your monthly payments or the amount you owe at the end of the loan term. The lender doesn’t provide you with an accurate or complete account of these charges. You ask for a payoff statement to refinance with another lender and receive a statement that’s inaccurate or incomplete. The lender’s actions make it almost impossible to determine how much you’ve paid or how much you owe. You might pay more than you owe.

If you are having trouble paying your mortgage and the lender has threatened to foreclose and take your home, you may feel desperate. Another lender may contact you with an offer to help you find new financing. Before he can help you, he asks you to deed your property to him claiming that it’s a temporary measure to prevent foreclosure. The promised refinancing that would let you save your home never comes through. Once the lender has the deed to your property he starts to treat it as his own. He may borrow against it (for his benefit, not yours) or even sell it to someone else. Because you don’t own the home any more, you won’t get any money when the property is sold. The lender will treat you as a tenant and your mortgage payments as rent. If your rent payments are late, you can be evicted from your home.

You can protect yourself against losing your home to inappropriate lending practices. Simply put: don't agree to a home equity loan if you don't earn enough income to make the monthly payments on time every month.

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