Equity is the
financial interest or cash value of your home, minus the current loan
balance(s). If selling the home, this would also be minus any costs incurred in
selling the home.
Equity loans are money you borrow on the equity of your
home. This means, for the most part, you have to be a homeowner, even though
there are other ways of getting an equity loan. Ask your friends or family for
recommendations of lenders, if you decide that the timing is right for this
type of loan.
You are putting up your home as collateral by means of
considering a home equity loan. It can offer special interest rates, and even
tax incentives, which you should consult with a tax adviser about.
You can use
this loan as a home improvement loan. You can use an equity loan in many ways.
You can also it to pay for your kid's tuition.
The principle of equity loans is to provide income to homeowners to pay off
high-interest debts. In other words, persons who take out equity loans agreed
to utilize the sum of cash to pay off credit card interest, tuition, cars
payments, et cetera.
Equity loans are beneficial for non-investors, while some
equity loans are for investors, the majority is not. In hopes to make profit, investors
often purchase bonds, stocks, and property, while homeowners often invest in
equity loans in an effort to get rid of debts, or else find a resource to payoff
college fees, car loans, or to make improvements on the home.
At times, homeowners improve their home for the money, but
it is not in effort to make profit, but rather to build equity and increase the
home's value.
Homeowners in particular elderly, minority and those with
low incomes or poor credit-should be careful when borrowing money based on
their home equity. Why? Certain abusive or exploitative lenders target these
borrowers, who unwittingly may be putting their home on the line.
Abusive lending practices range from equity stripping and loan flipping to
hiding loan terms and packing a loan with extra charges. So as to avoid losing
your home, the Federal Trade Commission urges you to be aware of these loan
practices
Loan Flipping
Suppose you've had your mortgage for years. The interest
rate is low and the monthly payments fit nicely into your budget, but you could
use some extra money.
A lender calls to talk about refinancing, and using the
availability of extra cash as bait, claims it's time the equity in your home
started "working" for you. You agree to refinance your loan. After
you've made a few payments on the loan, the lender calls to offer you a bigger
loan for, say, a vacation.
If you accept the offer, the lender refinances your original
loan and then lends you additional money. In this practice-often called
"flipping"- each time you refinance, the lender charges you high
points and fees and may increase your interest rate.
You will have to pay that
penalty each time you take out a new loan, If the loan has a prepayment
penalty.
You now have some extra money and a lot more debt, stretched out over a longer
time. The extra cash you receive may be less than the additional costs and fees
you were charged for the refinancing. And what's worse, you are now paying
interest on those extra fees charged in each refinancing.
With each refinancing, you've increased your debt and
probably are paying a very high price for some extra cash. After a while, if
you get in over your head and can't pay, you could lose your home.
Equity Stripping
You are in need money. You don't have another source of
income coming in each month. You have built up equity in your home. A lender
tells you that you could get a loan, although you know your income is just not
adequate to stay beside the monthly payments.
In order to get the loan
approved, the lender encourages you to "pad" your income on your
application form.
This lender may be out to steal the equity you have built up in your home. The
lender doesn't care if you can't keep up with the monthly payments. As soon as
you don't, the lender will foreclose-taking your home and stripping you of the
equity you have spent years building.
If you take out a loan but don't have
enough income to make the monthly payments, you are being set up. You probably
will lose your home.
Hidden Loan Terms: The Balloon Payment
You've fallen behind in your mortgage payments and may face
foreclosure. Another lender offers to save you from foreclosure by refinancing
your mortgage and lowering your monthly payments.
Carefully observe the loan
terms. Since the lender is offering a loan on which you repay only the interest
each month, the payments may be lower.
At the end of the loan term, the principal-that is, the
entire amount that you borrowed-is due in one lump sum called a balloon payment.
If you can't make the balloon payment or refinance, you face foreclosure and
the loss of your home.
Foreclosure, repossession, and bankruptcy are common
problems in America
alone. Homebuyers often step into loans, believing there is no skill involved. Once
they sign the agreement, they soon learn that they took on an expense that may
lead them to financial ruin.
Home equity loans should provide a source of security for
the homeowner before considering the loans. If the equity loan is lacking
security, it makes no sense to venture your home for a bit of cash.
For more information about equity loans, it makes sense to
go online, since more information is available. Look for equity loan companies
and check out what rates they offer and what protection you have against
repossession if you are unable to pay your loans off.
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