Related To Story MORTGAGE CRISIS
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Borrowers Should Beware Home Equity Loans
Home Equity Loans Can Leave Borrowers Homeless
POSTED: 7:59 am EDT June 25, 2007
A home is often the biggest -- and sometimes the only major -- investment people make. On one hand, it offers homeowners a hefty source of collateral, but on the other hand, if borrowing against the home gets out of control, a homeowner can become a former homeowner -- and not by choice.
Sandy Shore, a manager of counselor training at the nonprofit financial counseling agency Novadebt, said homeowners should use caution when considering new loans.
"Clients take home equity loans for lots of different reasons. They finance home improvements, pay for weddings and college educations and consolidate debt," Shore said. "When you borrow against your home, you may get some tax advantages, but you may also put your home in jeopardy. I would never advise someone to borrow to finance something that will not have value by the time the loan is paid."For example, she said that rolling a car payment -- which would drag out to 30 years -- or consolidating credit card debt will definitely set borrowers back in the long run."The things you bought are long gone by the time the loan is paid, and you have added secured debt to the house," Shore said. "Some consumers become serial refinancers. They use their house to pay off credit cards and then use them again. They may get to the point where the ever-higher equity loan and the credit cards combined are too much to handle."While some borrowers seek out loans, Shore said that many people with fragile financial situations are sought out by predatory lenders who present credit opportunities in appealing packages, typically hiding the cons of the options, including:
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- Variable interest rates, or adjustable rate mortgages, which are loans with rates determined by an index. The rate may initially be less than a fixed mortgage rate, but if they indices change, borrowers may be subjected to substantially higher rates -- which cause payments to increase."Record numbers of consumers are facing foreclosure because of this," Shore said.
- Balloon payments, in which the loan doesn't amortize -- or recalculate to encompass both the principal and interest due -- so when the term of the loan ends, money is still owed to the lender. Shore said the new payment will be much higher, particularly if the borrower already has poor credit.
- Prepayment penalties, which require the borrower to have paid a minimum amount of interest -- often six months' worth -- if he or she wants to pay off the loan. Shore said these are intended to "trap the borrower in an unfavorable or unaffordable loan."
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