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.