Financial Affairs

Home equity loans come with risk

Thinking of buying a new vehicle or installing an inground pool? Maybe you need cash for your school fees, growing debt, or an extreme makeover for your pet. Maybe you would like to improve your home by remodeling it or adding more space. These uses and many more can be financed with a home equity loan or a home equity line of credit. But is it safe to use the money under any circumstances? Maybe, maybe not.

According to CoreLogic Q1 2020 Homeowner Fairness Report, “US homeowners with mortgages (about 63% of all properties) have seen their net worth increase by nearly $ 590 billion in total since the first quarter of 2019, an increase of 6.5%, from a year over year. The report also found that the average New Mexico homeowner earned $ 15,000 in equity during the same time period. CoreLogic is one of the world’s leading providers of real estate information, analytics and data-driven solutions.

While the benefit of borrowing against home equity can be very beneficial under the right circumstances, the downside of tapping into home equity is that a person could ultimately lose their home. That’s why you have to be very careful when deciding whether or not to mine your equity in the first place, let alone making sure that the money is put to good use.

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Before we explore how these products can be best used, let’s first define the term fairness. Equity is the difference between the market value of a property and the amount owed to it. For example, let’s say an owner in the Las Cruces area owns a property worth about $ 200,000. After deducting the $ 125,000 owed on the first (and only) mortgage, the difference of $ 75,000 represents the owner’s equity. If the property had no mortgage, the equity would be $ 200,000.

A home equity loan is essentially a second mortgage. An HEL can also be a first mortgage if it is the only loan on the property. The “number” assigned to a mortgage (ie, first, second, third, etc.) is determined by the order in which the mortgage document is registered with the county registrar’s office. With an HEL, you receive a lump sum in cash and pay it back in fixed monthly installments over a fixed term, just like a traditional mortgage. The most common duration of HEL is around 20 years.

Generally, a home equity loan is best used for one-time purposes where payment will be due in full and which has lasting benefits. Financing a home improvement that adds value and more equity to your home is a good example. Another reason to tap into your home equity might be to pay off high interest loans or credit card balances. It might not be such a great idea, however, if you turn around and top up your credit cards again. These people are known by the credit industry as credit card abusers.

In contrast, a home equity line of credit offers homeowners the ability to leverage their equity without having to borrow money. Instead, it lets you borrow only the amount you need when you need it. HELOC also gives borrowers more repayment options and only requires you to pay interest on the amount of money you have taken. With the actual loan, you pay interest on the full amount you borrowed whether or not you use it. HELOCs are also useful for short-term financing needs that arise unexpectedly. This line of credit is also a good choice for homeowners who are free from other loans, allowing them to access cash by simply writing a check against their equity.

Both types of loans come in fixed and variable rate versions. On average, HEL and HELOC rates hover around the country’s prime rate. The prime rate is the rate at which banks lend to their most creditworthy customers. According to Federal Trade Commission officials, obtaining your HEL or HELOC from a reliable source is also important.

According to an FTC consumer alert posted recently on its website,, “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 in your home. “

The Consumer Alert points out that some lenders are targeting homeowners who are elderly or have low incomes or have credit problems – and then attempt to profit by using deceptive practices. According to our country’s leading consumer protection agency, here are some methods used by unscrupulous lenders to deceive customers:

  • Loan reversal: This practice encourages homeowners to repeatedly refinance their loan, often to borrow more money. With each refinance, the lender charges additional fees and points of interest, which only increases the debt.
  • Insurance packaging: Here, lenders add premiums for credit, health and accident life insurance to the loan, which may not be desired or necessary by the borrower.
  • Bait and switch: In this scenario, the lender offers the consumer a particular set of loan terms and costs at the time of application and then presses the borrower to accept a higher fee when it is time to sign the documents. loan.
  • Dismemberment of equity: Here, the lender gives a loan based on the equity in the property rather than the borrower’s ability to repay the loan. If the borrower cannot make the payment, he could end up losing his home.
  • Non-traditional products: It is not uncommon for lenders to offer loans where the minimum payment does not cover the principal and interest owed, resulting in an increase in the loan balance and monthly payment. This type of loan, when coupled with a variable interest rate, can skyrocket monthly payments if interest rates rise.
  • Deceptive loan service: In this case, lenders fail to provide accurate or complete account statements or loan repayment information. This practice makes it almost impossible for a borrower to determine exactly how much he has paid or how much he owes.

The Federal Trade Commission also suggests that borrowers seek an explanation of any dollar amount, term, or condition that is unclear. Federal law is very specific about credit and loan term information that must be provided in writing before consumers apply for a loan or sign agreements. Additionally, the FTC suggests consumers learn more about equity loans by contacting banks and credit unions in their area. They further advocate that consumers speak with someone they trust before making decisions or signing agreements.

If you believe that an unscrupulous lender has abused you or someone you know, or if you want to learn more about deceptive lending practices, contact the FTC directly. They are easily accessible to or by calling 877-FTC-HELP (1-877-382-4357).

See you at closing!

Gary Sandler is a full-time real estate agent and president of Gary Sandler Inc., real estate agents in Las Cruces. He loves to answer questions and can be reached at 575-642-2292 or [email protected].

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