Tapping Home Equity to Pay Debts is Foolhardy Move Right Now by:Greg Pesetsky
Over the years, you have been a faithfully paying your home mortgage and all the while building up valuable equity in your most prized possession, your home. This equity often provides a quick line of credit that many homeowners are encouraged to tap into to pay off their existing debts (or even to pay for things like education, weddings, vacations, home improvements, and so on). However, tapping home equity to pay debts is a foolhardy move that can put your home at risk for foreclosure and leave you in even worse financial straits than you are currently in.
Home Equity Loan Myths
Many ill-advised homeowners are told that they should open up a home equity line of credit due to the current state of the economy. In fact, a recent article on SayEducate.com argues that because of the recent economic downturn that those Americans who have built up equity and are facing job loss should open up an equity line immediately! Worse advice was never given. If you have no job, you will have no money to pay for the equity loan. Although rates are at all time lows, those who are looking to be out of work would be jumping from the frying pan into the fire to take out a home equity loan or line of credit that they might not be able to repay.
Home Equity Loan Scams
Even for those homeowners who feel secure in their job but are in need of cash fast, there are hidden hazards involved in tapping into your homes equity. Home equity loans typically are written with variable rates of interest and/or teaser rates that entice borrowers to borrow, borrow, and borrow. These variable interest rate home equity loans often feature initially low costs but culminate with a huge balloon payment at the end of the loans term. And a variable rate of interest is just that variable. It varies based on current market conditions and adjusts at different intervals of time to a new rate, giving you an unpredictable payment that is hard to budget for or may be more than your income will allow you to make. This puts your biggest and most valuable asset, your home, at risk, if you should fail to make your required payments, including these huge balloon type payments, your home can be foreclosed upon, you could end up in bankruptcy, and your financial life would be a living nightmare. Make sure you dont fall victim to predatory lenders who are looking to fleece homeowners with home equity loans that they cannot afford. Protect yourself from home equity loan threats by reviewing the guidelines that follow.
Home Equity Loan Guidelines
Never, ever, under any circumstances, take out a home equity loan that is based on the value of your home instead of on your ability to repay the money being loaned to you or the credit extended on your behalf.
When considering a home equity loan, look at the total package youre being offered. This means looking at more than an initial offer of a low monthly payment, or no payments for a period of time. Read all the fine print. Can you really afford a balloon payment of several thousand dollars five years from now, seven years from now, or ever?
Never consider a home equity loan that is offered via an unsolicited telephone call. The same holds true for mailers that you receive from lending companies who want to solve all of your financial problems with a home equity loan.
Ignore high pressure sales tactics used by most home equity lenders, claiming that their offer is good only for a limited time sometimes only hours. This technique is laughable the company will offer you the same deal a year from now.
Consider credit counseling to help you get your financial life back on track instead of absorbing the risk of losing your home to foreclosure.
Avoid loans that might be billed as interest only, partially amortizing or non-amortizing. This is legal jargon that simply means that youll still owe money after all of your payments have been made, usually a balloon payment. Fail to pay it lose your home.
Never sign a deed of trust of quitclaim deed with a contractor. This is a tactic used among many contractors/lenders that will legally allow them to trick you out of your home. The only contract you should sign with someone doing repairs or renovations is a contract for home improvement services.
If you have just signed a home equity loan, the federal government gives you three business days to back out of a loan contract when your home is used as security for the loan (legally known as the right of rescission). Cancellation of the loan must be done within three days in writing.
About the author
Greg Pesetsky has worked in Debt Settlement for 8 years and is considered an expert in the industry by his peers. Greg is IAPDA Certified and has a good standing in the industry. He owns and manages Practical Debt Relief.