Home Equity Loans Pros and Cons - Warnings From The FTC and What to Look For When Shopping For a Home Loan - Bad Credit Refinancing

March 22nd 2006

Home Equity Loans

Prospective borrowers should be aware of scams and other problems associated with some lenders, especially if the borrower has bad credit. The Federal Trade Commission (FTC) urges you to be aware of these loan practices to avoid losing your home.

Some lenders may actually want to “steal” your equity by asking you to pad your income in order to qualify for a loan. When you are unable make your payments the lender will foreclose your home and “strip” you of your equity. There may be hidden costs associated with the foreclosure or you may be forced to pay exorbitant prepayment penalties. The FTC recommends all barrowers not pad their income and read the fine print to avoid these penalties.

Some lenders may offer lower payments but then include a balloon payment in the loan. This is more common with interest only loans. According to the FTC, these loans are usually targeted at homeowners in foreclosure.

Loan flipping is another method used to scam prospective barrowers. This entails a lender making an offer soon after you refinanced your home. He may say you can take a bigger loan for a vacation or other reason. If you accept the offer, he will refinance your original loan and then will lend you the additional money. With each new loan the lender or broker may collect new points or fees.

Never rush to sign papers. Some home improvement contractors work with lenders and may approach homeowners with prospective improvements. When the homeowner says he does not have the money, the contractor may offer to set the owner up with a lender. Sometime after the contractor begins work, the homeowner is asked to sign some papers quickly to complete the transaction. These loan papers could even be blank. Later you find out the interest rate, points and fees are outrageous. To make things worse, after the loan agency pays the contractor he may skip finishing the job to your satisfaction.

Lenders may also try to “pack” your loan with extra insurance. Here, the lender gives you sets of papers to sign hoping you don’t notice one of them includes a credit insurance policy. They may even tell you that if you don’t want the credit insurance, the loan papers will have to be rewritten, and may take several extra days.

Borrowers should also watch for mortgage servicing abuses. You may discover that after you signed the loan agreement that the payments are higher than expected. This may be because the payments include “escrow for taxes and insurance even though you arranged to pay those items yourself with the lender's okay.” The FTC says there may be other charges including legal fees added to what you owe. These added fees could add to your monthly payments and what you owe at the end of the term.

Here is another pitfall. Let’s say you are in foreclosure and another lender offers to help. Before he can help you, he asks you to deed your property to him, claiming that it's a temporary measure to prevent foreclosure. Once the lender has the deed to your property he may treat it like his own. He may barrow against your house for his benefit, not yours, or even sell it to someone else. You may not even get any money when the property is sold, plus he may want to charge you rent for living there and start eviction proceedings.