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Home Equity Loan Pitfalls

Some of the pitfalls of home equity loans

The home equity loan came of age in 1996 when changes in
the tax law eliminated deductions for the interest on most
consumer purchases. Interest paid on home equity loans,
however, remained exempt, up to $100,000 for taxpayers
filing jointly.

The two main types of home equity loans are fixed-rate
loans and variable-rate lines of credit (called HELOCs).
The terms for both range from five to 15 years. With fixed-
rate loans, the monthly principal and interest stay the
same. Adjustable-rate loans usually start at a lower
interest rate—meaning a lower monthly payment—but can climb
to a predetermined cap based on market conditions.

Most banks and mortgage companies are happy to make home
equity loans because the loan is secured by a tangible
asset that can be seized and sold to satisfy the debt if
necessary, which minimizes their risk. But the ease with
which homeowners can cash out their equity—sometimes up to
125% of the value of the home—brings with it certain
pitfalls.

Reloading

Home equity loans are appealing to people who have fallen
into a downward spiral of spending and borrowing. The cycle
of getting a loan to pay off debt and free up credit that
is then use to make additional purchases is called
“reloading.”

Reloading leads to accelerated borrowing that can result
in homeowners getting upside down on their home loans, e.g.
owing more than the home is worth. The loan is no longer
fully secured by collateral and if the borrower’s income
goes down or the home’s market value plummets, the owner
could face foreclosure or bankruptcy.

People who consolidate their credit card bills or car
loans into a home equity loan are transferring unsecured
debt to secured debt and putting their home in jeopardy.

Home Equity Scams

Another pitfall is predatory scammers. The Federal Trade
Commission warns about, “Unscrupulous lenders (who) target
older or low-income homeowners and those with credit
problems. These lenders may offer loans based on the equity
in your home, not on your ability to repay.”

Avoid lenders who tell you to falsify information on the
application, e.g. saying your income is higher than it is
to qualify for the loan.

Avoid lenders who don’t provide the required loan
disclosures or who tell you not to read them; or those who
won’t give you copies of the documents they want you to sign.

Avoid lenders who promise one set of terms when you apply,
and give you another set of terms to sign; or who ask you
to sign blank forms, saying they’ll fill in the blanks
later.

Don’t let anyone pressure you into using your home as
collateral to borrow money you may not be able to repay. If
you can’t make the payments, you could lose your home.

On the Plus Side

A home equity loan does have some pluses. Compared to
other forms of borrowing, it is easier to get, comes at a
lower interest rate, and has tax advantages that other
loans don’t. It can help borrowers clear up outstanding
bills while leaving them with a single monthly payment at a
lower rate of interest. True, this doesn’t reduce debt, but
it can restructure it in beneficial ways.

Many websites like www.homeequitydebtconsolidation.com
offer helpful information and a free quote. It doesn’t hurt
to see how much you might be qualified to borrow; just make
sure you weigh the pros and cons before signing anything.

For More Information About Home Equity Loans or Home Equity Line Of Credit click one of these links!

Until the next post………

Brian