The Home Equity Loan Zone

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.

Have you seen the ads? “Home equity loans are the perfect way to consolidate debt.” But the Federal Trade Commission warns, “Borrowers Beware!” And, the warning goes double if you’re a homeowner on a fixed income, a low income or have poor credit.

Why? The answer is simple. Home equity loans are very risky. You could end up losing your home and all the equity you put into it if you’re not able to pay back your loan and you don’t want that.

Sure, you’ll probably get a lower interest rate than you’re currently paying on your credit cards and the interest you pay will probably be deductible on your income tax returns, but you’ve got to understand you’re not going to get something for nothing. If you’re a risky borrower, lenders are just going to charge you a much higher interest rate, extra points or both to cover their risk. These extra charges could make your loan so costly you’d just be getting even deeper into debt.

Why do you suppose aggressive lenders advertise directly to risky borrowers?

The reason is the mortgage industry today is incredibly competitive and there are many predatory lenders who will promise risky borrowers anything – low interest rates, low monthly payments, no credit checks, no appraisals, free toasters – in order to get your business and their hands on your valuable home equity.

Why not? If you pay back your loan, they win. And if you don’t pay it back, they win. They just take your home and all of its equity in foreclosure. They have nothing to lose, but you could end up losing everything, including the roof over your head. And, if you don’t think that’s a possibility, consider the fact that foreclosures doubled last year in the state of California and are increasing all over the country.

Now I’m not saying you shouldn’t consider using a home equity loan to consolidate your debt. That choice is up to you. But, I do highly recommend that you do your homework first. Make sure you read all the ads, check out all the possibilities and carefully compare your options. If you’re not confident you’re making the right decision, definitely go over the small print with a fine tooth comb with a relative or friend you can trust who has more experience in these matters.

Follow this advice and you’ll have a good chance to consolidate your debt, save some money and still keep your “home sweet home.

If you’re looking to borrow money, using your home equity as collateral may or may not be a good idea. It all depends on your particular circumstances and the specific terms of your agreement.

A home equity line of credit (HELOC) is a type of revolving credit. Rather than borrowing a lump sum of money, it’s more like having another credit card. The lender approves you for a specific amount of credit for a specific length of time and then you get to draw against this line of credit pretty much whenever you want.

Since you’re using the equity in your home as collateral, you can usually qualify for a substantial amount of credit at a fairly low interest rate. Borrowing against your home equity in this manner may also provide you with certain tax deductions. But there are rules and limitations, so always check with your tax advisor first.

There are as many types of HELOCs as there are lenders. Most plans come with a variable rate rather than a fixed rate. Many offer attractive low introductory rates, sometimes even interest only payments. Most of these loans, however, have large up-front fees, closing costs and some even have annual fees. Also, at the end of the loan period, you may be facing a large lump sum balloon payment or a huge increase in your monthly payments.

In other words, you’re not going to get something for nothing. You’re still going to pay for the privilege of borrowing, even though you’re putting your home up as collateral. And, if, by any chance, you’re considered a risky borrower, your costs will be even higher.

So be sure to shop around for the best credit terms you can get with the least risk. And, by all means, always remember that you could end up losing your home if you’re late or can’t make a monthly payment or are unable to handle the balloon payment when it comes due.

A home equity line of credit can be a risky endeavor. That’s why many homeowners are very careful when using HELOC money. They use their credit lines for such major items as capital home improvement, emergency medical bills and financing college educations for their children. It’s usually not a good idea to use this credit for everyday expenses or for consolidating debt, especially if you’re just going to max out your credit cards again.

A home equity line of credit, like I said, may be a good way to get your hands on some extra cash. But, before getting involved with any loan, be sure to do your homework. Check out all the ads. See what they have to offer. Then contact different lenders and compare your options. And definitely know your risks before signing an agreement. You don’t want to gamble with the roof over you head.