Home Equity Loan

Home equity loans are second mortgages. You borrow money against the equity in your home and repay it over a fixed term. You pay most of your fees and closing costs upfront and choose a fixed or variable interest rate. Since the first mortgagee (lender) usually holds the deeds of the property, the second mortgagee will carry a higher risk and charges a considerably higher rate of interest. You can usually get approved for a home equity loan even if you have bad credit. Home equity loans are most often used for home improvements, education expenses, take a vacation, car purchases or to consolidate credit card and other high interest rate debt. All interest paid on a home equity loan up to $100,000 is usually tax deductible (check with your accountant to make sure). You can borrow more than your home's worth (up to 125%) depending on your credit and what state the property's located in. Borrowers Beware

Some things to beware of:

Beware of balloon payments. Most people avoid balloon payments, so remember to ask your lender if the loan you're interested in has a large balloon payment. A balloon payment is a lump sum principal payment due at the end of some mortgages or other long term loans. That means you must pay the entire principal (the amount you borrowed) at the end of the loan term in one very large lump sum called a balloon payment.

Always ask if there are prepayment penalties. Ask if the loan is a Prepayment Penalty Mortgage (PPM). A Prepayment Penalty Mortgage (PPM) is your choice, never a requirement. You should be able to pay extra money each month if you choose, on your home mortgage loan or payoff the entire amount at any time. Watch out for loans that charge steep penalties for 'overpaying' each month or paying off the loan early.

The benefit of selecting a Prepayment Penalty Mortgage (PPM) is usually reduced fees or a lower mortgage rate. If you know you will live in your home longer than the penalty in effect range, generally 2 to 5 years from the start of the loan, on 15 or 30 year fixed rate loan or adjustable rate mortgage, than a Prepayment Penalty Mortgage (PPM) may be what you want. Ask what the penalty fee is if you were to make extra monthly payments, or pay off your loan before the 2 to 5 year period, or if you decided to refinance or sell your home. You should compare a prepayment penalty mortgage (PPM) to a mortgage that does not contain a prepayment penalty, that is, interest rates and fees. You decide if a Prepayment Penalty Mortgage (PPM) would be right for you.

Make sure you read and understand every document you must sign for a home equity loan. If the lender asks you to sign papers that include monthly charges for insurance premiums or other 'services' that weren't mentioned before, that's questionable. The Federal Trade Commission (FTC) calls it 'credit insurance packing'. If you refuse to sign an 'extra' document, and the lender objects or says your loan papers will have to be rewritten or reconsidered, walk away, says Annelena Lobb, CNN/Money Staff Writer.

Beware of the home improvement scams: A contractor (who works in cahoots with the lender) arranges for work to be done and tells the consumer he knows of a cheap way to finance the project, low-cost financing, said Margot Saunders (a lawyer at the National Consumer Law Center). But the consumer isn't given documents to sign until after the work begins. Only then does he realize he is being issued a home equity loan, and probably an expensive one. But if he tries to negotiate terms or back out, the contractor threatens to leave the work undone.

Important: Truth in Lending Act
Anyone who wishes to borrow against their home equity, you have three days, it's a legal right, to walk away from that home equity loan if you change your mind for any reason within three days of its issue, according to the Truth in Lending Act. You must inform the lender of your wish to cancel the loan in writing and within three days of issue. The lender must then cancel its security interest in your home and return all fees to you, including any application and appraisal fees you paid to open the account.

Federal Laws
Major laws that govern financial institutions and protect individuals in their financial dealings

Organizations

Fannie Mae
Freddie Mac
Ginnie Mae
Nellie Mae
Sallie Mae

Consumer Info

Credit Bureau
Credit Report
Directory of Federal Agencies
Federal Trade Commission (FTC)
Identity Theft
Predatory Lending
Repair Your Bad Credit
Truth in Lending Act
Borrowers Beware

Miscellaneous

Private Mortgage Insurance (PMI)
Prepayment Penalty

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