Important Facts About Home Equity Loans and Lines of Credit

Some Advantages of a Home Equity Loan or Credit Line

A loan or Line Of Credit against the Equity in Your Home can pay for education or home improvements, for example, it can be used to finance an automobile or almost anything you want to buy. You get an advantage in that you can deduct the interest you pay on up to $100,000 of a home equity loan, whereas you cannot deduct interest on other consumer loans. (You can borrow more and still deduct the interest if you use the money for home improvements. If you're not going to use such a large Mortgage Loan for Home Improvements and still want to Deduct the Interest, though, you must be able to prove that your home equity, plus improvements, equals the amount of the loan.)

Some Disadvantages

You might end up exchanging Low-Interest or No-Interest Debts, such as medical or utility bills, for a high-interest home equity loan. Or, you may pay off a fixed-interest debt with a variable-interest-rate home-equity loan and find that you lose a lot when the interest rate increases substantially. Furthermore, even buying a car with a home-equity loan might not be a wise move considering the interest you will pay if you pay over an extended loan term.

Even more serious is the risk that the lending institution has the right to take possession of the house if you cannot meet your loan payments. Although foreclosure is not a profitable move for banks, the risk is still there.

Home Equity Fraud

Home equity fraud can victimize homeowners in a variety of ways. Most often the victims are elderly and living alone on a Fixed Income in a Home they have owned for at least 30 years. Home Equity Scammers will say or do anything to win an elderly victim's trust. If they can finagle title to the home, they may sell it or take out a large loan against the property. Then they'll take the proceeds and disappear. Or, if they can't get title, they'll try to sell the victim a refinanced loan package that a senior cannot possibly repay. They seek out people who are in trouble or whose homes need repair.

Or a scammer may sell an elderly homeowner a home-improvement contract that violates the Truth-in-Lending Act. They may start construction before the three-day cancellation period has expired, and they may intimidate the homeowner into completing the transaction. Once they start, they may never finish the work and disappear with the loan proceeds.

Some Unscrupulous Lenders can defraud homeowners into taking out home-equity loans with exorbitant interest rates and origination fees. The targets of this kind of fraud are often people who have Poor Credit Histories and limited access to conventional credit sources, minorities, and again, elderly homeowners. Often these people don’t even realize they are using their home as collateral, and if they do, they don’t realize the consequences of defaulting in their payments. Once they realize they’ve been defrauded, they don’t realize they have any recourse.

The fraud can be carried out by getting the homeowner’s signature on loan documents, which are often written in fine print. Sometimes the Mortgage Lender gets the signature without revealing the rest of the page, sometimes the signature is forged. Sometimes Truth in Lending disclosure documents are inaccurate, incomplete, or both.

Sometimes "service providers" telemarket, offering "Free Mortgage Information" on how to turn your home equity into cash. They often try to persuade the homeowner to Apply for a Large, Lump-Sum Reverse-Mortgage and to invest the proceeds into an annuity sold by an insurance company. They profit by charging up to thousands of dollars for doing little more than Referring the Loan Application and Personal Financial Profiles to Mortgage Lenders and Life Insurance Agents. The customer usually doesn't know about the Hidden Fees until the Service Provider delivers the Loan Check.

Here are some other tactics used by unscrupulous Home Equity Lenders:

•  Equity Stripping: Your loan is based upon the equity in your home, not on your ability to pay based upon your income. Thus, if you can't make the payments, you could Lose Your Home.
•  Loan Flipping: A Mortgage Lender encourages you to repeatedly refinance your loan to borrow more money. Each time you refinance, you pay additional fees and interest points that only serve to increase your debt.
•  Credit Insurance Packing: The Mortgage Lender adds Credit Insurance to Your Loan, which you may not need. But if you feel you do need it, you may be able to Find a Better Deal than what the Lender Offers if you shop around.
•  Bait and Switch: The Mortgage Lender offers One Set of Loan Terms when you apply, then pressures you to accept higher charges when you sign to complete the transaction.
•  Deceptive Loan Servicing: The Mortgage Lender doesn't provide you with accurate or complete account or complete account statements and payoff figures, so it is almost impossible for you to determine how much you have paid or how much you owe. You could end up paying more than you owe.

Terms Used by Lending Institutions

Below are some terms used by Mortgage Lenders.  Understanding what they mean will help you better understand your Rights and Obligations in discussing them and getting answers to your questions:

Usury limit: The Maximum Interest Rate an Unlicensed Mortgage Lender can charge, which can vary from state to state. This Rate Limit may also depend upon the Type of Loan offered.
Up-front costs or closing costs: These Mortgage Terms relate to the original costs of the loan, including the:

Appraisal Fee, Attorney's Fees, Title Search Fees, Mortgage-Recording Fee, Mortgage Tax, and Title Insurance.

You will want to understand exactly how much these fees will amount to before you sign the contract. The Mortgage Lender is not required to factor in the costs for you.

Appraisal fee: The cost charged to appraise your home or judge its market value.

Mortgage insurance: Insurance against your defaulting on the loan and which may be required by the Lender. Some Lenders offer it themselves; in other cases you may have to purchase it elsewhere.

Broker's fee: The fee you pay to whoever arranges your financing. (You should get this amount in writing in advance.)

Title search fee: The Fee Paid to the Lender to look up the title to the house and make sure there are no liens against the property.

Points: A "point" is equal to one percent of the loan amount. Each point adds between about one-eighth and one-fourth of one percent to the interest rate you pay. Comparison-shopping of points, as well as the Interest Rate, is advisable. An institution that offers no points may Charge a Higher Interest Rate, and vice versa. Your decision may be based upon how much you want to pay up front, since points are included in the up-front fees. Less money paid up front may mean slightly higher monthly payments.

On the other hand, a Mortgage Lender may offer to finance the points, rather than require that they be paid up front. In this case, there will be Finance Charges on the points that will Increase Your Monthly Payment.

Insecurity clause: This clause gives the Mortgage Lender the right to change the terms of the loan. The bank simply informs you what the changes will be. You can refuse to go along with them, but you would have to pay off your entire loan first.

Credit re-evaluation clause: This provision permits the Lending Institution to close or lower the line of credit if it finds that you no longer meet its Credit Standards.