By Wendy Clay on November 28, 2011
.jpg.aspx) Home equity loans can be a great source of credit but only in situations when they are absolutely necessary. Before applying for home equity loans, borrowers must consider whether or not their circumstances are of greater importance than the potential to lose their home, which can occur if the home equity loan goes unpaid, and if they are truly capable of repaying a home equity loan. If the answer is no for either of these questions, it is time to find another credit option, but if the answer is yes, there are a few things borrowers should know before taking out home equity loans.
First, there are many scam artists offering home equity loans and although they typically prey upon the elderly, anyone can fall victims to their schemes. Many scammers advertise home equity loans as debt consolidation tools, but if you are searching for a means of consolidating your debt, this is not the most beneficial method of doing so as it requires you to take on more debt before you can get out of debt. Some lenders also offer home equity loans as an easy way to fund renovations or as a means of refinancing one’s mortgage to avoid foreclosure, but one must be careful of over-the-top transaction fees when refinancing otherwise you may end up deeper in debt. Other advertising methods to be wary of include businesses that blatantly state their acceptance of clients with bad credit and those that call or come to your home offering a “bargain loan”. Unreliable lenders may also attempt to:
- Rush borrowers to sign,
- Ask them to pay upfront,
- Offer additional unnecessary services that only swindle the borrower,
- Establish repayment plans that feature small monthly payments initially and then a balloon payment later on that will be nearly impossible to pay when due,
- Prevent borrowers from making extra payments for a period of time and then enact harsh penalties for advance payments once that period of time has passed.
Now that you know many of the indicators of a bad home equity loan, how can you avoid getting one? First, check with more than one lender to compare and negotiate rates and make sure they are reputable institutions such as banks, credit unions, federally regulated institutions, or companies you have at least heard of and received referrals for from former clients or a state licensing agency. When you are negotiating interest rates, know your credit score and the average interest rates to expect based upon your score (you shouldn’t pay an interest rate over 10-11% if you have a good credit score). Also, be sure to find out all fees associated with the home equity loan, and try not to accept one with fees exceeding 5% of your loan amount. Before you sign and agree to anything, obtain a typed copy of your agreement and review it closely to ensure that the services you are applying for are listed using the correct terminology (i.e. you do not want to sign a document for an adjustable rate mortgage when you are really applying for a fixed rate mortgage). Finally, remember that there are financial experts that can advise you as you consider and apply for home equity loans, and once you have signed for a home equity loan you typically have three days to renege.
Sources:
Are Home Equity Loans a Bad Idea? TheAdvice.com, 1 Nov. 2010. Web. 2 Nov. 2011
<http://borrowingadvice.com/are-home-equity-loans-a-bad-idea/>.
Borrower's Guide to Home Loans. AARP, 2001. Web. 3 Nov. 2011
<http://publications.usa.gov/epublications/bad-loans/loan.htm#signs>.
Larson, Michael D. Borrower Beware: Bad Home Equity Loan Can Lead to Foreclosure. Bankrate, Inc.,
20 Sep. 2003. Web. 3 Nov. 2011 <http://www.bankrate.com/brm/news/loan/19990929.asp>.
Larson, Michael D. Warning Signs of Predatory Lending. Bankrate, Inc., 15 Nov. 2002. Web. 3 Nov. 2011 <http://www.bankrate.com/finance/mortgages/warning-signs-of-predatory-lending.aspx>. |