Home equity loans are excellent financial products as they provide higher loan amounts, lower interest rates and longer repayment programs than most other loans. Yet, there are certain risks that these loans entail and everyone should take them into account prior to applying for a loan based on home equity. Moreover, there are certain practices that unscrupulous lenders use that increase these risks or add new ones and you should be prepared to avoid those too.
Unscrupulous lenders target certain niches that are easier to exploit. They prey on those who need money urgently and include non advantageous terms and sometimes abusive conditions concealed within the fine print of the loan contract. These niches are: elderly people, minorities or groups that speak English as a second language and are not familiar with legal terms, people with poor credit or going through critical financial situations, etc.
The federal trade commission has advised on several practices that these lenders' targets may be subject to. These practices may include: Equity Stripping, Refinancing-Flipping, the concealed offer of a balloon loan, Refinancing or home equity loans with additional fees or costs concealed on the fine print of the loan contract, and many other practices that add costs and fees to your already packed budget risking at the same time your property.
Additional Fees And Costs
On home equity loans and on Refinance home loans that offer cash-out, lenders sometimes charge non advertized costs like closing charges, administrative fees, etc. that can add up to the overall price of the loan product increasing its cost significantly. In order to avoid these situations you need to be very cautious and inspect the fine print of any documents that you are asked to sign. Remember that most of these lenders have expertise on legal issues and may include onerous clauses on the loan contract that you might sign inadvertently.
Balloon loans are an interesting product when you are going through critical financial situations as they provide minimum payments. However, you need to understand how these loans work because there is a reason that allows the lender to offer such reduced installments. Balloon loans charge only interest on a monthly basis. The capital or loan principal is due at the end of the repayment program as a lump sum. Thus, you need to understand that even if you can afford the monthly payments easily, eventually you will need to come up with a high amount of money to cancel the loan or you will loose your property. It is sometimes possible to refinance the loan though.
Home Loan Flipping or increasing Cash-out refinancing occurs when lenders offer you a cash-out mortgage loan and provide you with additional funds by the use of the available equity on your home. Unfortunately this practice is widespread and causes debtors to continually increase their debt while getting their available income reduced due to the higher interest rates and fees that these new loans imply. Moreover, lenders tempt debtors by offering growing amounts that only add up to their existing debt.
Home Equity Stripping
Beware of those lenders or brokers that let you (or encourage you to) include a different figure than the one you should include on the income field. This can lead to the approval of the loan for a higher amount but it will also be a higher amount than you can afford as the monthly payments are set in such a way that they represent a portion of your income which is known to be suitable and affordable. Any difference may turn the loan into an onerous financial product and if you fail to repay the loan, you will be risking your property that would be subject to foreclosure.