Home Equity Loans
By Dan Johnson, Thu Dec 8th

Home Equity were initially designed to allow individualswho had not yet paid off the full amount of their home, theability to borrow against what portion of the home they had paidfor. So for example, a couple who had been making monthlypayments for many years on their 30 year lease, could use themoney they had already put into their home as collateral whenthey needed a loan to send their child to college. So, while theinitial intent of the loan is regarded by some as noble, inpractice it has served as a free-for-all for unscrupulouslenders and other scam artists.

Explaining Sub-Prime Lending Home Equity fall into a broadcategory known as sub-prime lending. Unlike prime lending, whichis heavily regulated and offered to those living in goodneighborhoods with fair to good credit, sub-prime lenders targetthose in bad neighborhoods with worse credit ratings. Becausethey offer to individuals who otherwise might havedifficulty finding a loan, they were and are able to justify tothe government the need to have greater free reign when it comesto setting the interest rates and finance charges associatedwith their loans.

This window, combined with the deep pockets of Home Equity Loanfirms able to grease the campaigns of politicians, has preventedthe industry from coming under the heavy scrutiny and regulationof prime lending. Consequently, what is seen in this industry iswidely varying interest rates, and charges that are completelydisproportionate with the risk incurred by the lendinginstitution.

How to Protect Yourself For the investor interested in taking ona Home Equity Loan, there are a few measures which can be takento radically diminish the chances of being taken advantage of.The first precautionary step is to request a copy of the loan afull week before you sign it. The lending institution isrequired by law, to provide you with a copy of the loan manydays in advance of you signing it. It is a rather simple task toask for the loan, and the lending institutions response oftenreveals much about the quality and legality of the loan. If thelending institution says, that either the loan paperwork is notyet ready, or otherwise fails to produce the paperwork inside ofa week prior to the signing, you should walk on the loan.

The catch-22, and consequently the reason why Home EquityLenders are able to take such advantage of borrowers, is thatoften they are facing foreclosure and desperately need the loan.While your need may be very real, signing a sub-standard loanwill ultimately put you in far worse shape than you ever werebefore.

Recognizing the Hidden Charges The second, and potentially mostimportant technique to prevent predatory lending, is to demandthat all loan costs not be rolled into the APR, but be listedand paid by you up front. What predatory lenders do to enticeindividuals into taking a loan, is to soak

up the equity in ahome and offer you a small kickback on the side. So, taking theexample of our couple above, let us imagine that they have$50,000 in equity in their $100,000 home and have a fixedmortgage rate of $650 a month. They then go to a Home EquityLender who tells them that upon signing the loan they will get$20,000 in cash and their new interest rate will be $580 permonth. What they do not tell the borrower is that they have alsocashed out the other $30,000 dollars in equity and paid it tothemselves in "refinancing fees." In addition, the new mortgagethey receive may either be variable, meaning that as interestrates climb so will their new payment, or be back loaded,meaning that by the end of the loan the payments may reach$1,200 a month.

Can Home Equity be useful? Yes, but only under idealcircumstances. By and large, they are a product designed byunethical lending companies to take advantage of those desperatefor a little cash now. If you plan on applying for a Home EquityLoan, it is vital that you take the two steps outlined above aswell as have an experienced independent third party go over theloan and its convoluted terms with you.

About the author:Dan Johnson enjoys writing about home equityloans.