Borrower Beware: Home Equity Loan Risks

By Debbie Wilson
Loan Page Columnist

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Taking out a home equity loan can help you cover critical expenses like college tuition, a new car, or home improvements. But there are some pitfalls you should be aware of before you sign on the dotted line.

Obtaining a home equity loan is fairly easy. The problem is that it might just be too easy. And since a home equity loan puts your house on the line as collateral, it's important to know exactly what you're getting in to.

Home Equity Loan Pitfalls

The following warning signs of a home equity loan that could land you in financial trouble can help you make a more informed decision regarding your mortgage.

• Unrealistic Low Payments: Some home equity loans lure you in with a low monthly payment. If this payment is interest only, you'll be left with a large balloon payment at the end of the term.
• Pre-payment Penalties: Some home equity loans actually charge steep penalties for "overpaying" or early payoff of a mortgage. You should be allowed to prepay or get out of a high-interest loan early.
• Credit Insurance: You shouldn't have to pay monthly charges for insurance premiums or other services not originally mentioned in your home equity loan documents.
• High Rates for Home Improvement Loans: Ensure your contracting work will get done the right way by obtaining your home equity financing before you get started on home improvements.

Finally, it is important to note that if you are borrowing against the equity in your primary residence, you have a legal right to walk away from that mortgage, for any reason, within three days of its issue. The Truth in Lending Act requires you to cancel your loan in writing and the lender must release its interest in your home and return all fees to you.

So, next time you need extra cash for education, home repair, or other important items, do a little research before signing on the "home equity loan" dotted line and keep your home safe and sound, just the way it should always be.

About the Author

Debbie Wilson currently operates a lakeside resort. Debbie holds a B.A. in Business Management with a minor in Physical Education.