Thinking of buying a new vehicle or installing an in-ground pool? Maybe you need money for tuition, mounting debts, or an extreme makeover for your pet. Perhaps you would like to improve your home by renovating or adding more space. These uses and many more can be financed with a home equity loan or a home equity line of credit (HELOC). But is it safe to use the silver – no matter the circumstances? Maybe, maybe not.
According to CoreLogic’s Homeowner Equity Insights report for the first quarter of 2021 (https://www.corelogic.com/press-releases/nationwide-homeowner-equity-gains-hit-1-9-trillion-in-q1-2021-corelogic-reports/), “U.S. homeowners with mortgages (about 62% of all properties) have seen their net worth increase by a total of nearly $1.9 trillion since the first quarter of 2020, an increase of 19, 6%, year over year. The report also found that the average homeowner in New Mexico earned $26,000 in equity over the same period. CoreLogic is a leading global provider of property 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. This is why you have to be very careful when deciding to exploit your capital in the first place, let alone make sure that the money will be put to good use.
Before exploring how these products can best be used, let’s first define the term capital. Equity is the difference between the market value of a property and the amount owed on it. For example, let’s say a homeowner in the Las Cruces area owns a property valued at around $200,000. After deducting the $125,000 owed on the first (and only) mortgage, the difference of $75,000 represents the homeowner’s equity. If the property had no mortgage, the equity would be $200,000.
A home equity loan is essentially a second mortgage. A HEL can also be a first mortgage if it is the only loan on the property. The “number” assigned to a mortgage (i.e. first, second, third, etc.) is determined by the order in which the mortgage document is registered at the county registrar’s office. With a HEL, you receive a lump sum of cash and pay it off 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 for which payment will be due in full and which have 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 could be to pay off high interest loans or credit card balances. However, this may not be such a good idea if you turn around and reload your credit cards. These people are referred to by the credit industry as credit card abusers.
In contrast, a home equity line of credit offers homeowners the ability to tap into their equity without having to borrow money. Instead, it lets you borrow just 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 withdrawn. With the real loan, you pay interest on the total amount you borrowed, whether you use it or not. HELOCs are also useful for short-term funding needs that arise unexpectedly. This line of credit is also a good choice for people who own their homes free of any other loans, allowing them to access available cash by simply writing a check against their equity.
Both types of loans come in fixed rate and variable rate versions. On average, HEL and HELOC rates hover around the national prime rate. The prime rate is the rate at which banks lend to their most creditworthy customers. According to the folks at the Federal Trade Commission, it’s also important to get your HEL or HELOC from a reputable source.
According to an FTC consumer alert recently posted on its website www.ftc.gov, “You could lose your home and your money if you borrow from unscrupulous lenders who offer you a high-cost loan based on the value net of your house. .” The consumer alert points out that some lenders are targeting elderly or low-income or credit-troubled homeowners – and then trying to take advantage of them through deceptive practices. According to our nation’s top consumer protection agency, here are some methods unscrupulous lenders use to defraud customers:
- Loan reversal: This practice encourages homeowners to refinance their loan repeatedly, often to borrow more money. With each refinance, the lender charges additional fees and interest points, which only increases the debt.
- Insurance Packing: Here, lenders add life, health and accident insurance premiums 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, then pressures the borrower into accepting higher fees when it is time to sign the documents. loan.
- Stripping of equity: Here, the lender makes 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 risks losing his house.
- Non-traditional products: It is not uncommon for lenders to offer loans where the minimum payment does not cover the principal and interest owed, possibly increasing the loan balance and monthly payment. This type of loan, when it comes with a variable interest rate, can cause monthly payments to skyrocket if interest rates rise.
- Misleading 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 request an explanation of any amount, term, or condition that is unclear. Federal law is very specific about credit information and loan terms that must be provided in writing before consumers apply for loans or sign agreements. Additionally, the FTC suggests consumers learn more about equity lending 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 think an unscrupulous lender has taken advantage of you or someone you know, or if you want to learn more about deceptive lending practices, contact the FTC directly. They are easy to reach at www.ftc.gov or by calling (877) FTC-HELP (1-877-382-4357).
See you at closing time!
Gary Sandler is a full-time realtor and president of Gary Sandler Inc., real estate agents in Las Cruces. He loves answering questions and can be reached at 575-642-2292 or Gary@GarySandler.com.