Home Equity Loans

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Thursday, June 01, 2006

Home Equity Loan Pitfalls

Home Equity Loan Pitfalls
by Mike Hamel

The home equity loan came of age in 1996 when changes in the tax
law eliminated deductions for the interest on most consumer
purchases. Interest paid on home equity loans, however, remained
exempt, up to $100,000 for taxpayers filing jointly.

The two main types of home equity loans are fixed-rate loans and
variable-rate lines of credit (called HELOCs). The terms for
both range from five to 15 years. With fixed-rate loans, the
monthly principal and interest stay the same. Adjustable-rate
loans usually start at a lower interest rate--meaning a lower
monthly payment--but can climb to a predetermined cap based on
market conditions.

Most banks and mortgage companies are happy to make home equity
loans because the loan is secured by a tangible asset that can
be seized and sold to satisfy the debt if necessary, which
minimizes their risk. But the ease with which homeowners can
cash out their equity--sometimes up to 125% of the value of the
home--brings with it certain pitfalls.


Home equity loans are appealing to people who have fallen into a
downward spiral of spending and borrowing. The cycle of getting
a loan to pay off debt and free up credit that is then use to
make additional purchases is called "reloading."

Reloading leads to accelerated borrowing that can result in
homeowners getting upside down on their home loans, e.g. owing
more than the home is worth. The loan is no longer fully secured
by collateral and if the borrower's income goes down or the
home's market value plummets, the owner could face foreclosure
or bankruptcy.

People who consolidate their credit card bills or car loans into
a home equity loan are transferring unsecured debt to secured
debt and putting their home in jeopardy.

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Home Equity Scams

Another pitfall is predatory scammers. The Federal Trade Commission warns about, "Unscrupulous lenders (who) target older or low-income homeowners and those with credit problems. These lenders may offer loans based on the equity in your home, not on your ability to repay."

Avoid lenders who tell you to falsify information on the
application, e.g. saying your income is higher than it is to
qualify for the loan.

Avoid lenders who don't provide the required loan disclosures or
who tell you not to read them; or those who won't give you
copies of the documents they want you to sign.

Avoid lenders who promise one set of terms when you apply, and
give you another set of terms to sign; or who ask you to sign
blank forms, saying they'll fill in the blanks later.

Don't let anyone pressure you into using your home as collateral
to borrow money you may not be able to repay. If you can't make
the payments, you could lose your home.

On the Plus Side

A home equity loan does have some pluses. Compared to other
forms of borrowing, it is easier to get, comes at a lower
interest rate, and has tax advantages that other loans don't. It
can help borrowers clear up outstanding bills while leaving them
with a single monthly payment at a lower rate of interest. True,
this doesn't reduce debt, but it can restructure it in
beneficial ways.

Many websites like Home Equity Debt Consolidation offer helpful information and a free quote. It doesn't hurt to see how much you might be qualified to borrow; just make sure you weigh the pros and cons before signing anything.

About the author:
Mike Hamel is the author of several books and the Senior Writer
for AIM Techs, an Internet marketing company that specializes in
advanced SEM techniques and developing sites like http://www.homeequitydebtconsolidation.com Home Equity
Debt Consolidation.

Home Equity Loan

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