Tapping Home Equity to Pay Debts is Foolhardy Move Right Now

Tapping Home Equity to Pay Debts is Foolhardy Move Right Now
by: Greg Pesetsky



Over the years, you have been a faithfully paying your home mortgage –
and all the while building up valuable equity in your most prized
possession, your home. This equity often provides a quick line of credit
that many homeowners are encouraged to tap into to pay off their existing
debts (or even to pay for things like education, weddings, vacations,
home improvements, and so on). However, tapping home equity to pay debts
is a foolhardy move that can put your home at risk for foreclosure and
leave you in even worse financial straits than you are currently in.

Home Equity Loan Myths

Many ill-advised homeowners are told that they should open up a home
equity line of credit due to the current state of the economy. In fact, a
recent article on SayEducate.com argues that because of the recent
economic downturn that those Americans who have built up equity and are
facing job loss should open up an equity line immediately! Worse advice
was never given. If you have no job, you will have no money to pay for
the equity loan. Although rates are at all time lows, those who are
looking to be out of work would be jumping from the frying pan into the
fire to take out a home equity loan or line of credit that they might not
be able to repay.

Home Equity Loan Scams

Even for those homeowners who feel secure in their job but are in need of
cash fast, there are hidden hazards involved in tapping into your home’s
equity. Home equity loans typically are written with variable rates of
interest and/or teaser rates that entice borrowers to borrow, borrow, and
borrow. These variable interest rate home equity loans often feature
initially low costs but culminate with a huge balloon payment at the end
of the loan’s term. And a variable rate of interest is just that –
variable. It varies based on current market conditions and adjusts at
different intervals of time to a new rate, giving you an unpredictable
payment that is hard to budget for or may be more than your income will
allow you to make. This puts your biggest and most valuable asset, your
home, at risk, if you should fail to make your required payments,
including these huge balloon type payments, your home can be foreclosed
upon, you could end up in bankruptcy, and your financial life would be a
living nightmare. Make sure you don’t fall victim to predatory lenders
who are looking to fleece homeowners with home equity loans that they
cannot afford. Protect yourself from home equity loan threats by
reviewing the guidelines that follow.

Home Equity Loan Guidelines

• Never, ever, under any circumstances, take out a home equity loan that
is based on the value of your home instead of on your ability to repay
the money being loaned to you or the credit extended on your behalf.

• When considering a home equity loan, look at the total package you’re
being offered. This means looking at more than an initial offer of a low
monthly payment, or no payments for a period of time. Read all the fine
print. Can you really afford a balloon payment of several thousand
dollars five years from now, seven years from now, or ever?

• Never consider a home equity loan that is offered via an unsolicited
telephone call. The same holds true for mailers that you receive from
lending companies who want to solve all of your financial problems with a
home equity loan.

• Ignore high pressure sales tactics used by most home equity lenders,
claiming that their offer is good only for a limited time – sometimes
only hours. This technique is laughable – the company will offer you the
same deal a year from now.

• Consider credit counseling to help you get your financial life back on
track instead of absorbing the risk of losing your home to foreclosure.

• Avoid loans that might be billed as interest only, partially amortizing
or non-amortizing. This is legal jargon that simply means that you’ll
still owe money after all of your payments have been made, usually a
balloon payment. Fail to pay it – lose your home.

• Never sign a deed of trust of quitclaim deed with a contractor. This is
a tactic used among many contractors/lenders that will legally allow them
to trick you out of your home. The only contract you should sign with
someone doing repairs or renovations is a contract for home improvement
services.

• If you have just signed a home equity loan, the federal government
gives you three business days to back out of a loan contract when your
home is used as security for the loan (legally known as the right of
rescission). Cancellation of the loan must be done within three days in
writing.

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About The Author
Greg Pesetsky has worked in Debt Settlement for 8 years and is considered
an expert in the industry by his peers. Greg is IAPDA Certified and has a
good standing in the industry. He owns and manages Practical Debt Relief.

Visit the author's web site at: http://www.practicaldebtrelief.com