Home equity loans give homeowners the ability to borrow against the equity they have in their homes. Equity is the difference between a home’s market value and the amount owed. For example, if you still owe $225,000 on your mortgage and the market value of your home is $325,000, you have $100,000 in equity. Equity is generally significant with homeowners who have owned their homes for a long time, or where market values are rising rapidly.
Home equity loans are granted by banks, mortgage brokers, credit unions, private lenders, and other real estate lenders. When lenders grant these loans, they secure them with a “second mortgage” on the property. This mortgage encumbers the title of the property until the loan is repaid. Most equity loans have variable interest rates that fluctuate with economic conditions; this interest is usually tax-deductible.
There are two main types of home equity loans: a conventional equity loan and a line of credit. With a conventional equity loan, you receive the proceeds in a single, lump sum and pay interest on the entire principal from the beginning. With an equity line of credit, you can withdraw and repay money from an equity account and pay interest only on the money that you’re using.
Where there is strong equity in the property and a reliable borrower, home equity loans are generally quick to obtain and hassle-free. This can be both a positive and a negative. Because equity credit can be easier to obtain than other loans, borrowers are prone to take advantage of the ready cash. As they do, the equity in their home goes down and their monthly payments go up.
Avoid Fraudulant Practices
There are many scam artists eager to prey on unsuspecting borrowers. Don’t become the victim of one of them.
You can avoid the devastating effects of fraudulent lending practices by following the basic guidelines offered by the Federal Trade Commission:
DO NOT
* Enter into a home equity loan if you have insufficient income to support it.
* Sign any papers you haven’t read or any documents that have vacant spaces that could be filled in after you sign them.
* Allow anyone to pressure you into endorsing any document you don’t understand.
* Agree to a loan that contains unwarranted credit insurance or other features you don’t want.
* Allow the promise of extra cash or lower payments to cloud your good judgment about whether or not a loan is really worthwhile.
* Deed your property to anyone without consulting an attorney.
DO
* Request specific information if credit insurance is a mandatory condition of your loan. If credit insurance is not required and you don’t want it, check to make sure it has not automatically been added. If there has been a fee added to the loan, ask that the charge be removed from the loan text. If you do want some sort of credit insurance, take the time to shop around for the best rates and terms.
* Maintain careful records of what you’ve paid, reconciling billing statements with cancelled checks. Question any charge that appears to be inaccurate.
* Read and review all items carefully. In the case that you need any terms or conditions explained, talk to someone you can trust first.
For more about scams, please see Home Equity Loan Scams.
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