Home Equity Loan Lowdown

Beware of Abusive Lenders

The alarm bell is ringing for the home equity loan borrowers amidst the reports that home equity scams are increasing day by day. If you have your own home, then there is no doubt that it is your greatest single asset. If you if you agree to a loan that's based on the equity you have in your home, you may be putting your most valuable asset at risk. The solution: homeowners with low incomes or poor credit scores must be careful while borrowing money based on their home equity. Certain lenders tend to target such type of borrowers.

If you fall behind in your mortgage payments and face foreclosure, another lender might offer to save you from foreclosure by refinancing your mortgage and lowering your monthly payments. Before accepting the loan, look carefully at the loan terms. The payment may be lower because you repay only the interest each month. However, at the end of the loan term, the principal will be due in one lump sum. If you fail to pay that, you will lose your home.

Know Your Lender Before You Take That Loan

By Priya Jestin, Staff Writer

If you plan to take a loan against your home’s equity anytime in the near future, better beware of the many frauds and other problems that are associated with some lenders. If you have a bad credit, you are especially vulnerable. The Federal Trade Commission (FTC) has issued a warning to people urging them to be aware of such loan practices to avoid losing your home. 

I know it sounds scary and you begin to wonder if you could actually trust anybody. But there is no need for a panic attack. When you plan to borrow, try to keep a cool head and find out if the lender you approach is credible. Some lenders try to ‘steal’ your equity by asking you to pad your income in order to qualify for a loan.  Why do they do this? Because at some point of time, you will be unable to make your payments. The lender will then foreclose your home and take away your equity.

Loan flipping is another method used to scam prospective barrowers.  This entails a lender making an offer soon after you refinanced your home.  He may say you can take a bigger loan for a vacation or other reason.  If you accept the offer, he will refinance your original loan and then will lend you the additional money.  With each new loan, the lender or broker may collect new points or fees.   

How Does Your Lender Assess You?

--By Priya Jestin, Staff Writer

Taking a loan against your home’s equity is not a simple and easy decision. It is one that has to be mulled over, you need to examine the various lenders available, check their offers and decide on the loan that offers you maximum benefits. Now, before offering you that loan, the loan officer will assess you on various fronts and only if you match up to their criteria, will you get a great loan.

One of the most important things here is your creditworthiness. The lending institution considers your creditworthiness when deciding whether to extend a loan and how much of an interest rate you will pay. Your creditworthiness involves three things: your credit history, your income and the loan-to-value ratio. Lenders want to know how much you make and how long you've been at your job, as well as how long you have been working in your particular field.

They will look at your total debt-to-income ratio: How much of your monthly income goes toward paying the mortgage, credit card bills, car payment and other obligations, including the payments on the equity debt for which you are applying. Most lenders want to keep that ratio under 36 percent.

Do You Qualify For A Reverse Mortgage?

--By Priya Jestin, Staff Writer

Are you into your 60s and own a fairly decent-sized home? If you are in need of money, you can think about using the equity in your home. According to the National Reverse Mortgage Lenders Association, the higher federal loan limits have many benefits for older homeowners. With a reverse mortgage, senior homeowners can now tap into a larger portion of the equity in their homes.

If your liquid savings are not too high but you have a house with a lot of equity, then this product helps you better your finances. So, what is a reverse mortgage and how can it benefit the older generation. To get the benefits of this tool, you must fulfill certain requirements. Firstly, you have to be 62 or older for this.

You can take a loan on the house or in other words, you can pull out the equity in your home in the form of a loan. And what’s the best part about this loan? It doesn’t need to be repaid until you either move house, sell it or die. That means you have years ahead of you before you need to think about repaying that loan!

There is just one serious catch to the product. Your loan amount will depend on your age, current interest rate and other loan fees. To get an estimate of how much you might get in a reverse mortgage, check out AARP's "Reverse Mortgage Calculator" at www.rmaarp.com. AARP is an extremely useful and unbiased source of information on reverse mortgages. For more information go to AARP's very useful Web page on this topic.

Know Your Home Equity Loan

According to bankers, the recent fever to tap home equity has finally cooled. Now, new fixed-rate offerings are attracting homeowners to convert adjustable rates to more predictable payments. This way, clients are now taking home equity loans with fixed payments for five to 30 years. The loan comes at a fixed interest rate and at least a small amount going to pay off the principal every month.

Since conversions allow consumers to convert all or part of their adjustable rate balance to a fixed rate, increasing numbers of customers are now converting. Even banks are now promoting the fixed rate rather aggressively. With this method, you are essentially locking in a portion of the borrowed money at a fixed rate. This can be paid back in principal and interest. Madison.com reports:

Rates on home equity lines of credit are higher versus one and five years ago, while rates on fixed-rate home equity loans are lower than five years ago, said Greg McBride, senior financial analyst for Bankrate.com., an Web-based aggregator of financial rate information.

Read more: Getting a fix on home equity loans

Boom’s Over, Now Comes The Bust

Guess bad times shadow everyone. I mean until now I only thought about how bad things were for me. A high interest rate on my home equity line of credit was just the beginning of a long list of highs. And none of this is going to end anytime now thanks to the Feds. Since June 2004 it has raised short-term interest rates from 1 percent to 5.25 percent. This was with the intent of achieving a "soft landing" – an economic slowdown that reduces inflation without causing a recession

I have a feeling that things are not going to be so easy. At the end of the day, it’s us homeowners who will take a big beating. My only worry is if people like us will be able to tide over these hard times. Only time will tell.

Avoid That Loan, Use Other Options

Almost every expert worth his name is now busy advising people on how it is the worst time to take money from your home as average sale prices are falling, interest rates are rising, and foreclosures are way out-of-control. But what do you do if you are deep in debt and want to pay off those loans before your situation gets worse? Fool.com reports:

That's why Bills.com co-CEO Andrew Housser says that it's best to exhaust other sources of financing for debt consolidation before tapping into home equity. "Using your house to pay off unsecured debt can be very risky. If you choose this route, make sure you leave yourself some financial breathing room, so that if something unexpected does happen, you will not risk losing your home."

Read more: Defying the Bubble Babble

Know The Rules On Home Equity Loans & Property Exchange

Want to use our home equity to purchase an investment property and plan to do an Internal Revenue Code 1031 tax-deferred exchange? There are quite a few things you need to know about a 1031 exchange before you decide to make the exchange. Mortgage101.com reports:

Most tax advisers suggest renting your former home at least six to 12 months (to show rental intent) before making an IRC 1031 tax-deferred exchange.

Read more: Homeowners eye real estate exchange, hit legal hurdle

Here’s A Tale To Warn You Of Shady Lenders

Maria Rivera took a home equity loan of $10,000 to pay for home improvement costs. She was lured into taking the loan by ads that promised affordable loans for home improvement projects. Now, seven years after a contractor tore up her house without making the promised repairs, Maria is paying $122 every month for her home-equity loan and still has three years of payment left. And instead of a new bathroom, she was left with ruined carpets and a damaged support beam.

There are many such shady lenders spread across the country. They defraud customers out of hundreds of thousand of dollars by promising them easy, low-cost loans. Firstly, don’t ever take a loan against your home’s equity unless you really need it. And secondly, always take a loan from a reputable organization that has more than a few years of business behind it.

High Credit Card Debts? Don’t Worry, Pay It Off With A Home Equity Loan

High interest credit card debt troubling you no end? Why don’t you just take a loan against your home’s equity and pay off that damn debt and be free again? Why don’t you!! If you’ve seen even one such article on the Internet (apart from my introduction of course) just check who’s done the writing. My bet’s that almost all of them were written by mortgage brokers.

If you read that and heeded that advice, I can only offer you my deepest sympathies. First of all if you’ve been maxing your credit cards, you have a problem bro, and that needs to be sorted out. And you cannot sort it out by losing the roof over your head. Yes, that’s exactly what you will be doing if you take out a home equity loan. Bestsyndication.com reports:

For most people, this is their single biggest investment and financial asset. So, this loan to pay off unsecured debt is secured by the roof over their heads, which costs more each month when a loan is taken out against it.

Read more: Home Equity Loan to Pay Credit Card Debt, Bad Idea!