I am interested in a home equity loan and am researching it now, hence this question. I have read stories about unscrupulous lenders. What are some things I should watch out for?
Just as there are many good lenders willing to assist you, there are also bad ones. This is an excellent question. Several things you should consider and compare include:
Equity Stripping. Some lenders will tell you to fudge on your income or expenses so it looks like you have more to spend for the monthly payment than you really do. If you can't make the payments you then agree to, you could lose your home in foreclosure.
Balloon Loans. Watch out for balloon payments. This type of a payment schedule is based on a longer repayment period -- such as 30 years, but in 5 or 10 years, the loan matures, and everything that is still unpaid is due in full. You can have a very large payment owed and if you do not have money to pay it off, you are faced with selling the property or refinancing it. With a refinance you would have to qualify for a new loan based on your financial circumstances, you would have closing costs owed, and your interest rate could be higher.
Flipping. Some lenders will tell you that you have established equity in your home and that you should use that. Each time you borrow, the new loan will have clsoing costs associated with it. These may be costs you don't need to pay. Do not borrow needlessly and you should not borrow often when the costs will not be recouped in a reasonable time.
Packing. Watch out for credit insurance and other fees that get added to your new loan or your monthly payments. Be sure that you only agree to items that you want or need. The lender should be willing to make you the loan without these additional costs being "packed" in.
Borrowing Under Stress. If you just had storm damage your roof and a contractor tells you it can start right away, don't jump too fast. You have to know that the contractor is legitimate and does good work. Especially after major storms devastate an area, these scammers will attempt to defraud you. They may ask for a large fee to move you to the top of the work list, or they have you pay up front without getting the materials to do the work or paying the laborers to complete it. In some cases they may offer to start right away and execute a contract later. When your roof is stripped, they tell you it is time to sign a contract. That contract may be at a high rate of interest, include exorbitant fees or both. At this point you have few options.
Remember, there are several laws that will assist you. These include the Truth in Lending Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act and the Federal Trade Commission Act. Combined, these laws prohibit unfair and deceptive practices and discrimination, and require disclosures so that you have the information you need to borrow wisely. A reputable lender will discuss the work with you in advance so you know what will be borrowed and for what purposes, and they will provide you with early disclosures that show how much you will borrow, what fees will be paid to whom, and what your payments will be, in addition to your interest rate and annual percentage rate.
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Just as there are many good lenders willing to assist you, there are also bad ones. This is an excellent question. Several things you should consider and compare include: 