The Home Equity Loan Zone

Mortgage delinquencies and foreclosures are increasing all across the country, especially in the highly volatile California housing market. Low income families that took out higher interest mortgage loans specifically designed for subprime borrowers are at the greatest risk.

As the mortgage industry became more competitive over the last ten years of rising home prices and record low interest rates, loans made to subprime borrowers – people with weaker credit ratings – suddenly became a billion dollar industry. In 1994, less than 5% of mortgages were at the subprime level. But by 2005, these loans accounted for over 20% of the market.

But the housing market is cooling off. Interest rates recently inched up and home prices are experiencing record breaking depreciation. The result? Many industry experts are concerned that too many borrowers are at risk for default. And they’ve got good reason.

Too many people took out loans with adjustable rates, interest only payments, balloon payments and other nontraditional mortgages. As interest rates and energy costs have risen, many of these borrowers are now facing serious challenges making their monthly payments.

Some experts are even concerned that an increase in foreclosures could threaten the country’s banking system. William Longbrake, a senior policy advisor to the Financial Services Roundtable, believes, “The worst is yet to come…. The bottom is probably still many months ahead.”

If you are or think you are going to have trouble making your monthly mortgage payments, don’t despair. There are things you can do to prevent foreclosure, but you must act immediately. Don’t wait.

Contact your lender right away and have an open, honest, conversation about the details of your situation. Lenders are not in the foreclosure business. They are willing to work with you and do what they can to help you keep your home. But the longer you wait, the more difficult the conversation will be.

In other future blogs, we’ll take a look at what you and your lender can specifically do to help prevent foreclosure.

If you’re considering a second mortgage home equity loan, watch out for Mortgage fraud. Mortgage fraud is one of the fastest growing white collar crimes in the country, adding to over $1 billion a year in losses.

Aggressive lenders often persuade unsuspecting homeowners to participate in their fraud, putting them at risk for fines and/or jail sentences. Their most common prey are sub-prime borrowers – i.e. people with low incomes and/or weak credit ratings.

So, if you want to stay out of jail, watch out for the common warning signs of mortgage fraud. Be skeptical and don’t just automatically believe everything your lender tells you. You don’t want your need or desire for a second mortgage get in the way of your judgment. Play it safe. Double check with your state regulating agency if something smells fishy.

Misrepresenting yourself on a loan application is probably the most common mortgage fraud. Lying on a loan application constitutes mail or wire fraud, which is punishable by fine and jail time. Therefore, don’t ever over exaggerate your income or home value or under report your personal debt on a loan application. Also don’t ever be conned into using an Employer Identification Number or EIN to create a new credit identity. It’s also against the law.

Every line on your application form should be filled by you. Don’t leave any lines blank or allow the loan agent to change any information. Deceitful lenders have been known to add fraudulent information to applications. But, ultimately, you’re signing the form and totally responsible for its accuracy.

In all your excitement and nervousness, don’t let anyone rush you through the closing process. Before you sign the contract, make sure your loan amount is not more than your home’s appraised value and that you’re not being charged any unexpected fees. Also check that your monthly payments are what you expected them to be and that there is no clause that forces you to pay “daily interest” for any reason. In other words, read the small print.

Lenders may also try to sell you credit insurance. They may even imply that purchasing credit insurance is a requirement of your contract. It’s not illegal for them to do this, but it is highway robbery. Credit insurance is very expensive and very difficult to cancel once you sign the agreement. But it is your choice to purchase credit insurance or not. No one can force you to buy it.

One final point. Beware balloon payments that often go along with low monthly and interest only payment plans. Balloons are extremely risky. Many borrowers are losing their homes to foreclosure because they didn’t have a fail-safe plan to get out of their balloon when it came due. So don’t get yourself into a balloon loan unless you know exactly what you’re doing.

Using the equity in your home as collateral for a loan to pay off unsecured credit card debt may be a good idea. It’ll probably get you a lower interest and some tax benefits.

But home equity loans are not without risk. If you’re unable to control your spending and just max out your cards once again, you could end up losing the roof over your head. So it might be to your benefit to consider other options first.

Actually, if you’re in debt, the best place to start digging out is to stop spending. Financial self-discipline can do wonders if you’re in money trouble. Hide your credit cards for a while and begin paying for purchases only in cash. And, if you can’t afford something, don’t buy it. At least not now.

A second option is to find a credit card with a low “fixed” rate. Make sure it’s not one with a low introductory rate that’s just going to go up in three to six months. Then transfer your other credit card balances to this less costly card.

Another excellent option is to pay off higher interest rate cards first. For example, let’s say you have three cards and only $100 to put towards paying off your debt each month. Make only minimum payments on the lower interest cards and apply the rest of your available cash to the higher interest card. As soon as you pay off that card, repeat the same process with the other two cards. This is one of the most highly recommended ways to get out of debt.

And, finally, if you’re so deep in debt it’ll take you five years or more to pay your way out, a home equity loan may be your best option. Because of lower interest rates and tax benefits, it would most certainly help lower your cost of borrowing.

But be on your toes, because there are a lot of predatory lenders out there willing to promise you anything – low monthly payments, low interest rates, no credit checks, no appraisals, you name it – just to get their hands on your home equity. They’re a major reason why foreclosures are at record highs all across the country.

If you decide to go with the equity loan option, make sure you do your homework first. Read all the ads and check out all your options. Get as many mortgage offers as you can to compare the fine print. And, if you’re hot sure what you’re doing, get some help. Ask a knowledgeable friend or relative you can trust to go over the details of your mortgage before you sign any papers.

Be safe rather than sorry and you can probably pay off your debts, save some money and keep your home – your most valuable asset.