Are you thinking of buying a new vehicle or installing an in-ground swimming pool? Maybe you need cash for tuition, increasing debt, or an extreme makeover for your pet. You might want to upgrade your home by remodeling it or by creating more space. These uses and more can be financed with a home equity loan or a home equity line of credit (HELOC). But does it make sense to use the money – no matter under what circumstances? Maybe, maybe not.
According to CoreLogic's Homeowner Equity Insights report for the first quarter of 2021 (https://www.corelogic.com/press-releases/nationwide-homeowner-equity-gains-hit-1-9-trillion-in-q1-2021 – corelogic-reports /), "US homeowners with mortgages (about 62% of all real estate) have increased their equity by nearly $ 1.9 trillion since the first quarter of 2020, a year-over-year increase of 19.6% ". The report also showed that the average New Mexico homeowner gained $ 26,000 in equity over the same period. CoreLogic is a leading global provider of real estate information, analytics and data-driven solutions.
While the benefit of home borrowing can be very beneficial in the right circumstances, the downside of tapping into home equity is that a person could ultimately lose their home. This is why you should take great care in deciding whether or not to use your equity at all, not to mention that the money is going to be used for a good cause.
Before we examine how these products can best be used, let's first define the term equity. Equity is the difference between the market value of a property and the amount owed for it. For example, let's say a homeowner in the Las Cruces area owns a property valued at around $ 200,000. After subtracting the $ 125,000 owed on the first (and only) mortgage, the difference of $ 75,000 is the homeowner's equity. If the property had no mortgage, the equity would be the full $ 200,000.
A home loan is essentially a second mortgage. A HEL can also be a first mortgage if it is the only loan against the property. The "number" assigned to a mortgage (ie first, second, third, etc.) is determined by the order in which the mortgage document is recorded in the county registry office. With a HEL, you receive a lump sum in cash and pay it back in fixed monthly installments over a fixed term, just like with a classic mortgage loan. The most common length of the HEL is around 20 years.
Typically, a home loan is best used for one-time goals that require full payment and that have ongoing benefits. A good example is home improvement financing that will add value and fairness to your home. Another reason to tap into equity in your home can be to repay high-interest loans or credit card balances. However, this might not be a great idea if you turn right and top up your credit cards again. Such people are called credit card abusers by the credit industry.
In contrast, a home equity line of credit gives homeowners the option to use their equity without having to borrow the money. Instead, you can only borrow the amount you need when you need it. The HELOC also offers borrowers more repayment options and only requires that you pay interest on the amount of money raised. With the actual loan, you pay interest on the entire loan amount – whether you use it or not. HELOCs are also well suited for short-term financing needs. This line of credit is also a great choice for people who own their homes free and free of other loans so they can access cash by simply writing a check against their equity.
Both loan types are available in fixed and variable interest versions. On average, prices for both HELs and HELOCs are around the country's key interest rate. The base rate is the rate at which banks lend their most creditworthy customers. Getting your HEL or HELOC from a reliable source is also important, according to the people at the Federal Trade Commission.
According to a recent FTC consumer warning posted on http://www.ftc.gov, "You could lose your home and money if you borrow from unscrupulous lenders who offer you an expensive loan based on the equity that You have in your home ". . "The Consumer Alert indicates that certain lenders are targeting older, low-income homeowners or credit problems – and then attempting to exploit them through fraudulent practices. According to our country's leading consumer protection agency, here are a few methods unscrupulous lenders use to denounce customers:
- Loan Reversal: This practice encourages homeowners to repeatedly refinance their loans, often to borrow more money. Every time you refinance, the lender charges additional fees and interest points – which simply increases the debt.
- Insurance packaging: This is where lenders add credit life, health, and casualty insurance premiums to the loan that the borrower may not want or need.
- Decoy tactics: In this scenario, the lender offers a consumer certain loan terms and costs at the time of application, and then urges the borrower to accept higher fees when the time comes to actually sign the loan papers.
- Stock stripping: Here, the lender issues a loan based on the equity of the property, rather than the borrower's ability to repay the loan. If the borrower cannot make the payment, they can lose their home.
- Non-traditional products: It is not uncommon for lenders to offer loans where the minimum payment does not cover the principal and interest due, causing the balance of the loan and monthly payment to eventually go up. This type of loan, when coupled with a floating rate, can cause monthly payments to skyrocket as interest rates rise.
- Fraudulent Loan Service: In this case, lenders will not provide accurate or complete bank statements or loan disbursement information. This practice makes it almost impossible for a borrower to determine exactly how much they paid or how much they owe.
The Federal Trade Commission also suggests that borrowers request an explanation for unclear dollar amounts, terms, or terms. Federal law is very specific about what credit and repayment period information must be submitted in writing before consumers apply for credit or sign contracts. Additionally, the FTC suggests that consumers learn more about equity loans by contacting banks and credit unions in their area. They also advocate that consumers speak to someone they trust before making decisions or signing agreements.
If you believe that an unscrupulous lender has taken advantage of you or someone you know, or if you want to learn more about fraudulent lending practices, contact the FTC directly. They can be easily reached at http://www.ftc.gov or by calling (877) FTC-HELP (1-877-382-4357).
See you when you close!
Gary Sandler is a full-time real estate agent and President of Gary Sandler Inc., Realtors in Las Cruces. He is happy to answer questions and can be reached at 575-642-2292 or Gary@GarySandler.com.
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source https://seapointrealtors.com/2021/08/01/think-twice-before-taking-out-a-home-equity-loan/
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