Dangers Presented By Home Equity and Consolidation Loans
Home Equity Loans
The major downside shared by all second mortgages, home improvement loans and
home equity loans is that creditors require the borrowers to use their homes as
collateral for the loan.
Once a lender acquires a lien on the property, if the borrower can’t make the
monthly payments, the lender can foreclose and take the house, even if the
borrower is current with their first mortgage payments.
Home equity loans are often used as a “solution” for people who simply don’t
have enough income to repay their unsecured debts, but they all too often result
in long-term payments that are beyond their means. This sad fact is all the more
tragic when you consider that each state has laws that protect a certain amount
of home equity from creditors. In bankruptcy, these laws allow you to discharge
your unsecured debts and keep the protected equity in your house. Unfortunately,
when people opt not to file bankruptcy but to try and pay off their credit cards
or other debts with a home equity loan, they turn dischargeable debt into
secured debt. Thus, if they end up having to file bankruptcy later on, they get
stuck with a lot of debt that would have been discharged if they hadn’t gotten a
home equity loan
While home equity loans are often attractive because they usually offer low
interest rates and lower monthly payments, but the total amount of payments
often adds up to be much greater than the original amount of debt. The total
amount of interest over such a long period of time, usually 15-30 years, can be
huge. With the frequently changing economy and unstable job market, home equity
loans can quickly turn disastrous for many people. Creditors are willing to
offer these lower rates because they know that they can foreclose on the
property if the borrower is unable to pay back the loan. Furthermore, when
interest rates are low, borrowers are especially susceptible to getting in
trouble with home equity loans. Most home equity loans are variable rate loans,
and the interest charged by the bank increases as the Federal Reserve Board
increases the Prime Rate. As interest rates increase, a once affordable home
equity loan payment may sky rocket, making the home equity loan payment
unaffordable
Many home equity loans also have other costs that aren’t always apparent, and
can quickly run up the cost of the loan. Lenders often pad the deal with other
extra charges like credit life insurance. Borrowers are usually responsible for
paying for title insurance a new appraisal and origination fees. Other
disadvantages of home equity loans include “balloon payments” and “teaser
rates.” A “balloon payment” requires the borrower to pay off the entire amount
of the loan after a certain number of years. This usually results in more loans
and more fees. Borrowers without great credit might not be able to get a big
enough loan to pay the balloon payment, and can quickly find themselves in
foreclosure. A “teaser rate” is a low introductory interest rate that can
increase during the term of the loan, sometimes by several percent, drastically
increasing the total cost of the loan. Some home equity loans can be “flipped”
into a new loan with a higher interest rate and add other additional costs.
More and more people who get home equity loans find they end up owing more money
on their houses than they are worth. This can be very risky, and although real
estate prices traditionally appreciate over time, it is dangerous to count on
the value of a home increasing to meet the total amount of debt secured by the
home. Many people find themselves in situations in which selling their house
would not generate enough money to pay off the home equity loan after payment of
the first mortgage and closing costs.
Home equity loans can be beneficial in the right situation, but people should
always consult with an attorney before using their home as collateral and
potentially creating a bigger problem in the long term. Please feel free to
contact us now at 1-800-493-1590 to talk to us about your situation.
Alternatively, you can get started by completing our
free case evaluation form.
Debt Consolidation Loans
Debt consolidation loans are personal loans that allow people to consolidate
their debt into one monthly payment. The payments are often lower because the
loan is spread out over a much longer period of time. Although the monthly
payment may be lower, the true cost of the loan is often dramatically increased
when the additional costs over the term of the loan are factored in.
The interest rates on personal debt consolidation loans are usually high,
especially for people with financial problems. Lenders frequently target people
in vulnerable situations with troubled credit by offering what appears to be an
easy solution.
Personal debt consolidation loans can be either secured or unsecured. Unsecured
loans are made based upon a promise to pay, while secured loans require
collateral. Upon default of the loan payment in a secured loan, the creditor has
a right to repossess any of the items listed as collateral for the loan. Title
loans are an example of secured loans, where an automobile’s title is listed as
collateral and the borrowers must pay off the loan to reacquire their title.
Some creditors require borrowers to list household goods in order to obtain a
debt consolidation loan. The creditor has a right to repossess these items upon
default of the loan payments. In many states, a person filing bankruptcy can
remove the lien on the household goods listed as collateral and eliminate the
debt.
Be careful about putting up your valued property as collateral. With high
interest rates and aggressive collections, you might find yourself scrambling to
save your car or personal property. Please feel free to contact us now at
(503) 352-3690 to talk to us about your situation. Alternatively, you can get
started by completing our free case evaluation form.
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