Harmful Home Equity Practices

This is the last of four planned posts on the subject of home equity loans.

We’re using a four part article published by the Federal Trade Commission (FTC) on their Consumer Information website. You can and should visit this site, not only to view this article but to see the other topics of information that pertain to many of us. Click here to visit.

Four part Series:

Home Equity Loans and Credit Lines – Introduction

If you’re thinking about making some home improvements or looking at ways to pay for your child’s college education, you may be thinking about tapping into your home’s equity — the difference between what your home could sell for and what you owe on the mortgage — as a way to cover the costs.

Loan or Line of Credit

Home equity financing can be set up as a loan or a line of credit. With a home equity loan, the lender advances you the total loan amount upfront, while a home equity credit line provides a source of funds that you can draw on as needed.

Shop and Compare

When considering a home equity loan or credit line, shop around and compare loan plans offered by banks, savings and loans, credit unions, and mortgage companies. Shopping can help you get a better deal.

Stay Within Your Budget

Remember that your home secures the amount that you borrow through a home equity loan or line of credit. If you don’t pay your debt, the lender may be able to force you to sell your home to satisfy the debt.

Harmful Home Equity Practices

You could lose your home and your money if you borrow from unscrupulous lenders who offer you a high-cost loan based on the equity you have in your home. Certain lenders target homeowners who are older or who have low incomes or credit problems — and then try to take advantage of them by using deceptive, unfair, or other unlawful practices. Be on the lookout for:

  • Loan Flipping: The lender encourages you to repeatedly refinance the loan and often, to borrow more money. Each time you refinance, you pay additional fees and interest points. That increases your debt.
  • Insurance Packing: The lender adds credit insurance, or other insurance products that you may not need to your loan.
  • Bait and Switch: The lender offers one set of loan terms when you apply, then pressures you to accept higher charges when you sign to complete the transaction.
  • Equity Stripping: The lender gives you a loan based on the equity in your home, not on your ability to repay. If you can’t make the payments, you could end up losing your home.
  • Non-traditional Products: The lender may offer non-traditional products when you are shopping for a home equity loan:
    • For example, lenders may offer loans in which the minimum payment doesn’t cover the principal and interest due. This causes your loan balance, and eventually your monthly payments, to increase. Many of these loans have variable interest rates, which can raise your monthly payment more if the interest rate rises.
    • Loans also may feature low monthly payments, but have a large lump-sum balloon payment at the the end of the loan term. If you can’t make the balloon payment or refinance, you face foreclosure and the loss of your home.
  • Mortgage Servicing Abuses: The lender charges you improper fees, like late fees not allowed under the mortgage contract or the law, or fees for lender-placed insurance, even though you maintained insurance on your property. The lender doesn’t provide you with accurate or complete account statements and payoff figures, which makes it almost impossible for you to determine how much you have paid or how much you owe. You may pay more than you owe.
  • The “Home Improvement” Loan: A contractor calls or knocks on your door and offers to install a new roof or remodel your kitchen at a price that sounds reasonable. You tell him you’re interested, but can’t afford it. He tells you it’s no problem — he can arrange financing through a lender he knows. You agree to the project, and the contractor begins work. At some point after the contractor begins, you are asked to sign a lot of papers. The papers may be blank or the lender may rush you to sign before you have time to read what you’ve been given. The contractor threatens to leave the work on your house unfinished if you don’t sign. You sign the papers. Only later, you realize that the papers you signed are a home equity loan. The interest rate, points and fees seem very high. To make matters worse, the work on your home isn’t done right or hasn’t been completed, and the contractor, who may have been paid by the lender, has little interest in completing the work to your satisfaction.

Some of these practices violate federal credit laws dealing with disclosures about loan terms; discrimination based on age, gender, marital status, race, or national origin; and debt collection. You also may have additional rights under state law that would allow you to bring a lawsuit.

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2 thoughts on “Harmful Home Equity Practices

  1. Thank you, Tri-Town Apple,

    This was a very helpful post. I now know what home equity loans are and what to watch out for when I apply for one. You may have just saved me a lot of trouble!

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