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When it comes to signing your loan papers make sure you recognize every document handed to you and be sure to question those you may not have previously discussed. Here are some red flags you may want to be aware of or pay close attention to before signing your home equity loan:
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Prepayment Penalties
:
Many loans charge penalties for paying back your loan before the term is
up, overpaying each month, or paying back the loan within the first 3
years. Some penalties can be as high as 10% of the loan amount or 3 months
of monthly payments. It is important to ask about these penalties
especially if you are planning to sell your house within three years of
the loan.
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Credit Insurance Packing
:
If the lender gives you papers to sign that include charges for credit
insurance or other "benefits" that you did not discus or you did not want
ask about them. Do not be afraid to ask questions. The lender may tell you
that this insurance comes with the loan, leading you to think it comes at
no extra cost. If you object to signing this document the lender may say
the papers will have to be rewritten or reconsidered, walk away. If you
agree to the insurance, you are really paying extra for the loan by buying
a product you may not need or want. The Federal Trade Commission calls
this "credit insurance packing".
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Balloon Payments
:
Loans with unrealistic low payments may require a large lump sum at the
end of the life of the loan. Loan payments may be low because the lender
only requires that you repay only the interest each month, then at the end
of the loan term the principal (the total you amount you originally
borrowed) is due in one lump sum called a balloon payment. If you can’t
make this payment you face foreclosure and the loss of your home unless
you can refinance.
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Negative Amortization
:
Although this less practice is less seen less frequently today than in
past years, in this case your monthly payments on your home equity loan do
not cover all the interest you owe either. Therefore, you still owe the
principal plus additional interest that has accrued overt he term of your
loan.
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Loan Flipping
:
A lender calls to talk about refinancing explaining how you should take
advantage of the equity in your home and have it work for you by allowing
you extra cash for spending. You decide to refinance. After making a few
payments the lender calls to offer a bigger loan. If you accept, the
lender refinances your original loan for more money, higher points, fees
and may increase your interest. Also the prepayment penalty from your
initial loan may need to be paid. This is called "flipping".
The Federal Trade Commission warns consumers that there are a number of abusive tactics out there, including hiding loan terms and coercing homeowners to accept home equity loans they can’t reasonably afford. You can see some of these warnings from the FTC on their web site.
Equity Stripping: You may not have enough income each month for a loan payment, but, you have built up equity in your home. A lender may tell you that you can get a home equity loan even though your income isn’t enough to keep up with the monthly payments by suggesting you pad your income on your loan application to get your loan approved. Remember, monthly payments need to be made! The lender does not care if you can’t make the payments. They will foreclose by taking your home and the equity you have built along with it.
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