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Home Equity Loan Scams

Unlike a primary mortgage loan used to buy a home, a home equity loan is a second mortgage. There are legitimate ways to use home equity loans and unlock the value of your home to borrow a lump sum. Home buyers with good credit scores can also responsibly get credit lines secured by their homes. But with home equity scams on the rise, you should look for red flags.

Predatory lenders may offer you a high-cost loan based on the equity you have in your home. If you fail to pay back a home equity loan or home equity line of credit (HELOC), your home could go into foreclosure. You could lose your home and money if you borrow from unscrupulous lenders.

Even large or typically reliable financial institutions could slip up and fail to give you proper information. They might have negligent employees or loan officers who violate procedures. Certain lenders target homeowners who are elderly or who have low incomes. They go after borrowers who have:

  • Large credit card debts
  • Financial difficulty with their mortgage payments
  • Poor or lacking credit reports

Such lenders use deceptive practices to take advantage of vulnerable borrowers. This article helps you learn about your options and legal rights to avoid common scams.

Types of Home Equity Loan Scams

The Federal Trade Commission (FTC), the nation's consumer protection agency, cautions all homeowners to be on the lookout for mortgage fraud and scams, including:

  • Loan flipping: The lender encourages you to refinance the loan repeatedly and often to borrow more money. Each time you refinance, you pay more fees and interest points. That only serves to increase your debt.
  • Insurance packing: The lender adds credit insurance, or other insurance products, to your loan, which you may not need.
  • Bait and switch: The lender offers one set of loan terms when you apply, then pressures you to accept higher charges when you sign to complete the transaction.
  • Equity stripping: The lender gives you a loan based on the equity in your home, not on your ability to repay based on your income. If you can't make the payments, you could lose your home.
  • Non-traditional products: Many lenders offer loans in which the minimum payment does not cover the principal and interest due. This causes your loan balance and, eventually, your monthly payments to increase. Many of these loans also have variable interest rates, causing your monthly payment to increase further if the interest rate rises.
  • Deceptive loan servicing: The lender doesn't provide you with accurate or complete account statements and payoff figures. That makes determining how much you have paid or owe is almost impossible. You may pay more than you owe.

Some of these practices violate federal credit laws dealing with disclosures about loan terms. They may also constitute discrimination based on age, gender, marital status, race, or national origin. You also may have extra protected rights under state law that would allow you to bring a lawsuit.

Should I Use My Home as Collateral for a Home Equity Loan?

If you're thinking about using your home as collateral for a loan, be careful. Unless you can make the loan payments from your current income, you could lose your home and the equity you've already built. Since your home is often your most valuable asset, you must carefully research your options before using it as collateral.

Getting a balloon payment from your bank might feel good at first. A lump sum loan amount can help you fix up the house or make improvements. But the lure of extra money or the chance to reduce monthly credit payments can be very costly in the long run. High interest rates and other credit costs could get you in over your head.

Stop if the risks of using your home as collateral outweigh other credit options. You can apply for a personal loan or other kind of financial assistance. Loan options exist for borrowers not wishing to pledge their homes as collateral.

Tips to Avoid a Home Equity Loan Scam

Some scammers will get your information from public records. They will try to commit loan fraud using your Social Security number and other private information. Do not share your data, including bank account details, without first researching your lender. If you suspect something illegal is taking place, contact law enforcement.

Fraudsters will be more likely to charge upfront fees. Look out for expensive closing costs or attempts to sell you more products. For example, a lender might try to sell you its own insurance product. If you want the added security of insurance, shop around. Scammers will try to rush you into buying everything directly with them. Ask for time to browse your options.

You should also:

  1. Always ask for a written estimate of costs when you apply.
  2. Never sign a loan application if the terms are not what you saw when you applied.
  3. Ask for an explanation of any dollar amount, term, or condition you don't understand.

Federal law is very clear about what credit and loan term information must be provided in writing when you apply for a loan and before you sign any agreement. Consider speaking with a housing counselor for more tips.

Real Estate Loan and Financing Advice

Shopping for the best loan terms and interest rates is a good idea. You should contact lending institutions, such as banks and credit unions, and consult a legal or financial advisor before you make any loan decisions. You can also contact your local Fair Housing Office, attorney, or legal aid organization for information and help.

Talk to a real estate attorney for legal advice about home loans, purchasing property, or refinancing. An experienced property lawyer will understand the local laws and regulations and advocate to protect your interests.

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