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Common Home Equity Loan Scams

Just a few Common Home Equity Loan Scams to avoid

For homeowners who have a large equity on their homes already – it is best that you beware of some of the biggest swindles that many lenders can pull on you. There are so many scams nowadays that involve home equity loans that many people are losing their homes without proper reason. This is why it is always important for you to know when a lender is legitimately offering you a loan and when he is just out to scam you of your money and house. Here are some ways that some lender will try to trick you into losing your home:

Insurance padding – in this scam, you will qualify for a home equity loan with terms that fit perfectly in your budget and financial situation. However, when it comes time to sign the papers for the loan, you will notice that there are some extra costs that the lender will include in the total amount which the lender might describe as credit insurance. You might not think that this amount will matter, or you will just forego asking because you want to avail of the loan immediately, but in any case, that amount will add up and you will end up with an insurance bill that you didn’t want. The best way to deal with this is to make sure that the lender walks you through all the requirements and fees needed to get the loan. This way you won’t be kept in the dark about what exactly you are spending your money on.

The end payment on the principal amount – This is also known as the balloon payment. Suppose you are about to lose your home and are quite desperate in finding a way to save your home, a lender may come out of the blue who will offer you a home equity loan with lower monthly payments that your monthly income can afford.

However, after a few years, when you have fully paid off the interest and are going onto paying the principal amount, the lender will suddenly charge you the full amount of the principal payment! This is called the balloon payment that was described in your contract in small print and which you managed to overlook. Most people are unable to pay this balloon payment and lose their homes because of it.

The loan flip – When your home is mortgaged for a set number of years and you have a fixed interest rate, it is best to stick to that payment schedule rather than opt to refinance and end up with a variable interest rate in the end. Some scammers will offer you a loan that will give you a lot of money in the short term, but then you become victim to a high interest rate in the long term, higher than what you anticipated when signing papers. Always prudently assess the different interest rates that lenders will offer. Sometimes the mortgage you have on your house, even if it allows you limited cash flow monthly, will be a much better option to stick to than a home equity loans refinancing with an interest you cannot afford.


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