Suspicious Home Equity Lending Practices

There are many home equity lending practices that you should be aware of because they are not in your best interest. Some programs are scams, others just employ questionable ethics to help themselves and hurt you. If you are in the market for a home equity loan, here are a few things that you will want to be aware of.

Promotional Rates

Many of us receive promotional pieces of mail from home equity lenders on a regular basis. They will usually promote some special program that they have that allows you to get a certain amount of money from a home equity loan with a specific low monthly payment. You see the promotion and you start to think about how nice it would be to have some money with a low payment like that. However, what they failed to mention upfront was that the low payment is only a promotional interest rate period.

You might only get that low payment for the first six months or year of the loan. Then, the rate jumps up to a much higher interest rate, or becomes adjustable. This has burned many homeowners in the past and has even put their homes at risk because of it. Before you sign up for any home equity loans, make sure that you fully understand whether this is a fixed rate for the life of the loan or if it is a promotional rate. Not knowing this key fact can make your life a lot tougher down the road.

Interest Only Programs

Another questionable business practice by home equity lenders is when they offer interest-only loans and do not fully disclose what that means. While many borrowers might understand what an interest-only loan is, others might not. If you sign up for one without understanding the risks, it can really cause you a lot of problems. It is not uncommon for people to lose their house over this type of loan. 

With an interest-only loan, your payment will be smaller each month because you are paying nothing towards the principal of the loan. You are only paying the interest each and every month. The principal of the loan does not decrease and at the end of the loan, you have to come up with the entire amount of the loan all at once.

For those that are not prepared for this balloon payment, they will be blindsided. They can either refinance the loan into another home equity product or possibly lose the house if that is not an option for them. Therefore, before you sign up for a loan make sure that you know whether or not it is an interest-only loan.

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