Home Equity Loans: Read The Small Print

Home Equity Loans – Make Sure You Read The Small Print – because if you own your own home, it’s probably your greatest single financial asset. Sadly, if you agree to a loan based on the equity of your home, you may be putting your most valuable financial asset at risk and setting yourself up to lose big time.

Home-owners, particularly Seniors as well as those with low incomes or poor credit, should be wary when borrowing money based on their home equity as certain unethical lenders are targeting this type of borrower, who unknowingly could very well be putting their home very much on the line.

Unethical lending practices can range from equity stripping, to loan flipping with hidden loan terms and packing a loan with extra charges thrown in for good measure. Of course not all lenders are equal, but research is necessary before starting out along this sometimes treacherous road.

Equity Stripping

You know the drill – you’re in need of funds, your monthly income is low, but you’ve managed to build up equity in your home over the years. You seek out what you feel is a good lender. S/he lender tells you that you can get a loan based on your homes equity. You explain your low income, but the lender encourages you to ‘up’ your income figures on the application form to help get the loan approved.

This lender could typically be out to steal the equity you’ve built up in your home and this particular lender really doesn’t care if you default on the monthly payments, in fact s/he is more or less banking on you don’t make it. As soon as you default, that lender will foreclose – taking your home and stripping you and your family of the equity you’ve spent years building up. If you try to take out a loan but don’t have enough income to make the monthly payments, you are being set up – and alas, it’s most likely that you’ll lose your home.

The Balloon Payment

If you’ve fallen behind in your mortgage payments you may face foreclosure. Another lender offers to save you from foreclosure by refinancing your mortgage and lowering your monthly payments. Before you step up with pen in hand to place your signature – look carefully at the loan terms. The payments may be lower because the lender is offering a loan where all you repay each month is the interest, then at the end of the loan term, the principal – the entire loan sum that you borrowed is due in ‘one go’ the balloon payment. If you can’t make the balloon payment or refinance, you face foreclosure and the loss of your home.

Loan Flipping

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 “flipping”-the lender charges you high 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 loan.

You now have some extra money and a lot more debt, stretched out over a longer time. The extra cash you receive may be less than the additional costs and fees you were charged for the 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.

The “Home Improvement” Loan

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 may rush 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. Whatever you do – read the small print!

Related Reading: