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Home Equity Loan Pitfalls (DOC)

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					Best 850 Finance PLR Articles: www.financeequityloans.com

Title:
Home Equity Loan Pitfalls

Word Count:
584

Summary:
Home equity loans have been very popular the past ten years, but they
have their pitfalls. Learn the pros and cons before putting your home at
risk.


Keywords:
home equity loan, second mortgage, debt consolidation loan


Article Body:
The home equity loan came of age in 1996 when changes in the tax law
eliminated deductions for the interest on most consumer purchases.
Interest paid on home equity loans, however, remained exempt, up to
$100,000 for taxpayers filing jointly.

The two main types of home equity loans are fixed-rate loans and
variable-rate lines of credit (called HELOCs). The terms for both range
from five to 15 years. With fixed-rate loans, the monthly principal and
interest stay the same. Adjustable-rate loans usually start at a lower
interest rate—meaning a lower monthly payment—but can climb to a
predetermined cap based on market conditions.

Most banks and mortgage companies are happy to make home equity loans
because the loan is secured by a tangible asset that can be seized and
sold to satisfy the debt if necessary, which minimizes their risk. But
the ease with which homeowners can cash out their equity—sometimes up to
125% of the value of the home—brings with it certain pitfalls.

<b>Reloading</b>
Home equity loans are appealing to people who have fallen into a downward
spiral of spending and borrowing. The cycle of getting a loan to pay off
debt and free up credit that is then use to make additional purchases is
called “reloading.”

Reloading leads to accelerated borrowing that can result in homeowners
getting upside down on their home loans, e.g. owing more than the home is
worth. The loan is no longer fully secured by collateral and if the
borrower’s income goes down or the home’s market value plummets, the
owner could face foreclosure or bankruptcy.

People who consolidate their credit card bills or car loans into a home
equity loan are transferring unsecured debt to secured debt and putting
their home in jeopardy.

<b>Home Equity Scams</b>
Another pitfall is predatory scammers. The Federal Trade Commission warns
about, “Unscrupulous lenders (who) target older or low-income homeowners
and those with credit problems. These lenders may offer loans based on
the equity in your home, not on your ability to repay.”

Avoid lenders who tell you to falsify information on the application,
e.g. saying your income is higher than it is to qualify for the loan.

Avoid lenders who don’t provide the required loan disclosures or who tell
you not to read them; or those who won’t give you copies of the documents
they want you to sign.

Avoid lenders who promise one set of terms when you apply, and give you
another set of terms to sign; or who ask you to sign blank forms, saying
they'll fill in the blanks later.

Don’t let anyone pressure you into using your home as collateral to
borrow money you may not be able to repay. If you can't make the
payments, you could lose your home.

<b>On the Plus Side</b>
A home equity loan does have some pluses. Compared to other forms of
borrowing, it is easier to get, comes at a lower interest rate, and has
tax advantages that other loans don’t. It can help borrowers clear up
outstanding bills while leaving them with a single monthly payment at a
lower rate of interest. True, this doesn’t reduce debt, but it can
restructure it in beneficial ways.

Many websites like www.homeequitydebtconsolidation.com offer helpful
information and a free quote. It doesn’t hurt to see how much you might
be qualified to borrow; just make sure you weigh the pros and cons before
signing anything.