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

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Lenders may be more liberal because they view home equity loans as relatively safe. You can’t disappear with your house or hide it if you default on your loan, so the lender has a good chance of collecting the collateral. Also, you are likely to make your payments a priority if your home is on the line. Borrowers use home equity loans for some of life’s larger expenses, because homes tend to have a lot of value to borrow against.

Advantages of Home Equity Loans

Home equity loans are attractive to borrowers for a few main reasons:

• They typically have a lower interest rate
• They are easier to qualify for if you have bad credit
• Payments on a home equity loan may be tax deductible
• Borrowers can get relatively large loans with this type of loan

How to Find the Best Home Equity Loans

Finding the best home equity loan can save you thousands of dollars – at least. In order to get the best loan, I recommend that you:

• Shop around. Try a variety of sources (banks, brokers, and credit unions)
• Manage your credit score and make sure your credit reports are accurate
• Ask your network of friends and family who they recommend
• Compare your offers to those found on websites and advertisements

Additional Home Equity Loan Tips

To make the deal work out in your best interest, make sure that it is the right deal in the first place. Is a home equity loan a better fit for your needs than a simple credit card account? If you’re not sure, figure it out before you put your home at risk.

Plan out your budget ahead of time. Make sure that taking the loan will not overburden you.

Review and consider insurance to cover the payments if something happens. You may or may not need insurance. If you’re going to include it in your program, try to pay the premiums monthly – not up front.