The Hazards In Home Equity Loans

The home equity loan is a very convenient way of accessing money for needed house repairs or improvements, plus a standing credit line and immediately available cash. The long payment terms with low, fixed interest rates also allow them to have the money to pay off higher interest debts. The borrower however should be warned that there are attendant hazards.

There are lenders that offer lower interest rates and monthly payments without informing their clients that the interest rates are dependent on their credit scores. If these borrowers are unable to pay the higher payments in time, the lenders have the option to repossess their homes. Debt consolidation or refinancing is not a viable option as the homeowners may find it harder to pay the larger amortizations.

Granting that money is saved in the line of credit or home equity loan, a borrower might be tempted to spend more on his other needs. Seeing that they have paid off their credit cards, they will again start buying things and before they know it, they actually owe more and will be paying more. Consider also the possibility that what was spent will be higher than the projection - house repair costs more, college is more expensive, etc. - what will happen then? Instead of saving money, the borrowers may instead end up spending more.

There are lending companies that intentionally hide fees or charges which the borrowers will not be aware of until it is too late. This "fine print" is standard in many mortgage or loan documents, so the borrower should not hesitate to ask to be clarified on this. Some unethical practices are equity stripping, loan flipping and over borrowing. In equity stripping, the borrower's income is inflated to qualify him for a loan. The borrower then will have difficulty in his loan payments. There is loan flipping when the loan amount is increased by the lender by first increasing the current mortgage. Again, the borrower will have difficulty in paying because of the higher amount. Over borrowing is done by approving a loan that is more than the value of the house. Thus, the borrower is not entitled to a tax reduction and will have a hard time in his payments.

Home equity loan properly used will offer many benefits, although there are some known and unknown risks. Sound financial and budget practices are critical in keeping up to date in payments, no mother what the amount of the loan is.