Home equity loan tips on how to avoid predatory lending

Home equity loan tips are useful as they may suck you into a whirlpool of troubles if you are not careful about the loan deal you are making

home equity loan tips

Are you looking for a home equity loan? Or are you trying to borrow money to buy a home? There are good deals and bad deals. If you don’t want to get stuck with a bad one, be careful.

These home equity loan tips will be helpful to you to avoid the pitfalls of borrowing for your home:

  • Beware of great deals that come to you by way of the phone, mail, SMS or internet. More often than not, these too-good-to-be-true offers are scams.
  • Beware of home improvement contractors who offer to finance work on your home.
  • If you need a loan, check with your local bank first.
  • Read all paperwork carefully before you sign anything! A sales person may try to rush you into signing. Don’t fall for this.
  • Take your time and get help. Insist on getting copies of all of the papers ahead of time. Take plenty of time to review them. Show them to a lawyer if you can.

Unfair dealing is commonly called predatory lending. Here are some of the most common abuses to watch out for.

Seven Signs of Predatory Lending in Home Equity Loan Tips
  1. Excessive fees
    Some fees (including a charge called points) are not included in the interest rate. They are easy to disguise or downplay. However, all of these fees must be disclosed in the papers you sign. Find out about any of these add-on fees before you sign. If you don’t get good answers, don’t sign. (Fees on the best loans are less than 1%. Fees on predatory loans can be more much higher.)
  2. Abusive prepayment penalties
    This is a fee for paying off your loan early. Avoid this type of fee. An abusive penalty bars you from prepaying for a long time (more than three years) or charges you more than six months’ interest to prepay. This will make it hard to pay off your loan early. In the prime market (where the best loans are made), only a small percentage of home loans carry prepayment penalties of any length.
  3. Kickbacks to brokers (yield spread premiums)
    The broker is the person who sells you the mortgage; the lender is the bank, or other financial company, that actually lends you the money and services your loan. When you get a high interest loan, the lender often pays a yield spread premium” to the broker– kickback for charging you a high rate. Find out if the broker is getting this type of kickback.
  4. Loan flipping
    If you are re-financing, be sure that you are getting a real benefit from the deal. Flipping happens when a lender makes money by getting you to take out a new loan, while you just get farther and farther into debt. This is perhaps among the most important home equity loan tips because every time you refinance, you pay more fees and charges. Flipping can drain away any equity you have in the property and increase your monthly payments.
  5. Products you don’t need
    A lender may try to talk you into paying extra for extra insurances or other products along with the loan. Don’t buy any extras that you don’t really need.
  6. Mandatory arbitration
    Some loan contracts require mandatory arbitration, meaning that you are not allowed to take the lender to court if you find out that your lender has taken advantage of you illegally. Beware that this can severely limit your legal options later on if it turns out that your contract is illegal.
  7. Steering and Targeting
    A predatory lender may steer you into a higher interest rate mortgage, even though you could qualify for a better loan. These loans are more expensive and more likely to have unfair penalties and the like. Lenders are good at convincing you that this is a better deal than it really is. A lender who says that you have poor credit may be exaggerating or lying. Reliable sources estimate that up to half of borrowers with higher interest rate mortgages could have qualified for loans with better terms; you may be one of those borrowers.

    Ask the lender for your credit score. This score is based on your credit history and other factors. Or get your credit score online. For a $6.42 fee, you can get your credit score, along with a free annual credit report.

    Also, find out the prevailing prime mortgage rate in your area what local banks are charging. If you are paying more, ask questions or find another lender. Just one percentage point can increase the amount you pay back by many thousands of dollars.

Home equity loan tips are important because a home equity lets you borrow money, while using your house as collateral. Home equity loan is another option available to homeowners who may have a tight cash situation but have have a valuable house at their disposal, which they may sell and downgrade. But a home equity loan lets you get money out of your house, without having to lose it.

There are plenty of advantages: when your house is the collateral, the bank feels a lot more secure; they know you can’t exactly pack up your house and run away with it. Because there’s something they can foreclose on, banks consider home equity loans to be low-risk, secured loans. That means they charge a super-low interest rate, seldom above 1.3 per cent per annum. For reference, that’s less than a third of your CPF Ordinary Account rate (up to 3.5 per cent per annum), and about 1/6th of a personal loan rate (about six per cent per annum).

That super-low interest rate means home equity loans are quite cheap, and can provide a much bigger loan than you’d get through, say, a personal installment loan. Most other, unsecured loans can only lend you up to four times your monthly salary.

On top of this, the government in 2017, made regulatory changes to home equity loan restrictions. If your house is already paid up, you can borrow up to half its value, without having to meet Total Debt Servicing Ratio (TDSR) restrictions.

Sadly though, home equity loans can only be gotten for private a private property. This is because HDB rules says, “HDB flats can only be mortgaged to banks or financial institutions to finance the purchase of the flat itself. You are not allowed to use your HDB flat, which has been fully paid for, as collateral to banks to raise credit facilities for private reasons.“

If you are looking for a home equity loan, or are you trying to borrow money to buy a home, there are good deals and bad deals. If you don’t want to get stuck with a bad one, be careful and use the home equity loan tips here:

  • Beware of great deals that come to you by way of the phone, mail, WhatsApp or internet. More often than not, these too-good-to-be-true offers are scams.
  • Beware of renovation contractors who offer to finance work on your home.
  • If you need a home equity loan, check with a mortgage broker.
  • Read all paperwork carefully before you sign anything! A sales person may try to rush you into signing. Don’t fall for this.
  • Take your time and get help. Insist on getting copies of all of the papers ahead of time. Take plenty of time to review them. Show them to a lawyer if you can.

Written by Ravi Chandran

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