Home Equity Loans: Do Your Homework First

Do you own your home? If you do, your home is your biggest asset. So you are thinking about getting a loan that is based on the equity you have in your home. You need to be careful and do your research.

Homeowners, particularly the elderly, those with low incomes, minority, and poor credit, should be very careful when borrowing money. There are lenders out there that will target people who need a loan but don't realize they could be putting there house right in the lenders dirty hands. I have seen this happen many of times. It is very important that people know what they are doing!

Lenders do these over and over again; they go from equity stripping and loan flipping to hiding loan terms and packing a loan with extra charges.

1. Equity Stripping
You are in a position that you need money now. You don't have much money coming in every month and you have built equity in your home. A lender tells you that you can get a loan, even though you know your income will not be enough to make the monthly payments. The lender will tell you to "pad" your income on your application form to help get the loan approved.

You need to be aware; this lender doesn't care if you can't make your monthly payment. The first payment you miss the lender will foreclose, taking your home from you and stripping you of the equity you have built up. You are being set up since you know you don't have enough money to make your monthly payments. Your will lose your home.

2. Hidden Loan Terms: Balloon Payment
You have fallen behind in your monthly payments and you are facing foreclosure. Another lender steps in and tells you he can save you from foreclosure by refinancing your mortgage and lowering your monthly payments. You need to be suspicious.

Look over the loan terms very carefully. Yes, the payments may be lower because the lender is offering a loan where you pay only the interest each month, but look at the end of the loan term, the principal, the entire amount you borrow will be due in one lump sum called a balloon payment.

If you can't make the balloon payment you will be facing foreclosure and lose your home.

3. Loan Flipping
You have had your mortgage for years. Your interest rate is low and your monthly payments are right where you want them, but you could use a little extra money. Out of the blue a lender calls you and talks about refinancing. He mentions having cash in your pocket by refinancing. You agree to refinance. Now that you have made several payments, the lender calls to offer you a bigger loan, your thinking I could go on that vacation. You accept the offer; the lender refinances your original loan and lends you additional money.

This is called "flipping," the lender charges you high point fees each time you refinance and your interest rate increases. The loan may also have a penalty that you will have to pay each time you take out a new loan.

You have the extra cash but you also have more debt, stretched out over a longer time period. The extra cash is less than the additional costs fees you were charged for the refinancing.

With each time you refinance, your increasing your debt and probably paying a very high price for some extra cash. Now you are in over your head and can't pay, you could lose your home.

4. Home Improvement Loan
A knock at your door, it's a contractor that is offering to install a new roof and the price sound reasonable. You're interested, but can't afford it right now. He tells you no problem he can arrange the financing through a lender he knows. You agree, and the contractor begins work.

The contractor brings you papers to sign and rushes you through them so you don't have time to read the fine print. If you don't sign them now, he threatens to leave the work unfinished. After you have signed the papers, you find out later that they were for a home equity loan. The interest rate and fees are high.

Now the contractor hasn't been back and the work on your home isn't finished. The contractor isn't interested in your roof. The lender has paid him so he moves on to his next victim. Beware of this common practice by contract scammers. No real contractor will every just knock on your door. You go to a contractor, not the other way around.

5. Signing Over Your Deed
You are having trouble paying your mortgage and the lender has threatened to foreclose on your home. Now you are desperate. Another lender contacts you with an offer to help find new financing. Before he can help you, he asks you to deed your property to him. He claims it's just temporary prevent foreclosure.

Once the lender has your deed, he treats it as his own property. He can borrow money against it or even sell it to someone else. You don't own the home any more so you won't get any money when the property is sold. The lender will treat you as a renter and your payments are rent payments now. He can even evict you.

These and many more practices have happened since land was first deeded to individuals. In order to protect yourself against losing your home, you need to know the Do's and Don't.

Don't:
1.Agree to any type of loan if you can't pay the monthly payments out of your monthly income.
2. Sign any documents that you haven't read through or any document that has blank spaces to be filled in.
3. Let anyone pressure you into signing anything.
4. Agree to a loan that includes credit insurance or extra products you don't want.
5. Let the promise of extra cash or lower monthly payments get in the way of your good judgment.
6. Deed your property to anyone. Consult an attorney, a knowledgeable family member, or someone else you trust.

Do's
1. Ask specifically if credit insurance is required as a condition of the loan. If it isn't, and a charge is included in your loan, you don't want the insurance; ask that the charge be removed from the loan document. If you do want this insurance, shop around for the best rates.
2. Keep very careful records of what you have paid, including billing statements and canceled checks
3. Challenge any charge you think is inaccurate.
4. Check contractor's references every time you are having something done to your home. Get more than one estimate.
5. Read all items carefully. If you need an explanation of any terms or conditions, talk to someone you can trust.
6. Consider all the costs of financing before you agree to a loan.