Are you thinking of buying a new vehicle or installing an indoor pool? You may need cash for college tuition, rising debts, or an extreme renewal for your family pet. You may want to improve your home by renovating or adding more space. These and other years can be financed using a home equity loan or a home equity credit line (HELOC). But is it wise to use money – regardless of the occasion? Maybe, maybe not.
According to CoreLogic 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/), Homeowners in the US with mortgages (about 62% of all real estate) have seen their equity increase by a total of nearly $ 1.9 trillion since the first quarter of 2020, an increase of 19.6%, from year to year “. The report also revealed that the average New Mexico homeowner earned $ 26,000 in equity over the same period. CoreLogic is a leading global provider of proprietary information, analytics and data solutions.
While the positive side of home equity lending can be extremely beneficial under the right conditions, the disadvantage of using equity is that a person could eventually lose their home. That is why great care must be taken when deciding whether to even use your share capital in the first place, not to mention that the money will be used for a good cause.
Before we explore how these products can be better used, let us first define the term equity. Equity is the difference between the market value of a property and the amount owed against it. For example, suppose a homeowner in the Las Cruces area owns a property worth about $ 200,000. After deducting $ 125,000 due on the first (and only) mortgage, the $ 75,000 difference represents the owner’s equity. If the property did not have a mortgage, the equity would be all $ 200,000.
A mortgage is essentially a second mortgage. An HEL can also be a first mortgage if it is the only mortgage. The “number” assigned to a mortgage (ie, first, second, third, etc.) is determined by the order in which the mortgage is registered at the county registry. With a HEL you receive a lump sum and repay it in fixed monthly installments for a fixed period of time, like a traditional mortgage. The most common duration of HEL is about 20 years.
Usually, a equity loan is best used for one-off purposes for which the payment will be paid in full and has long-term benefits. Financing a home improvement that adds value and more justice to your home is a good example. Another reason to use equity in your home may be to pay off high interest rate loans or credit card balances. However, it may not be a good idea to turn right and reload your credit cards. These people are referred to by the credit industry as credit card abusers.
Instead, a home equity line of credit gives homeowners the opportunity to use their own funds without having to borrow money. Instead, it allows you to borrow only the amount you need when you need it. HELOC also gives borrowers more repayment options and only requires you to pay interest on the amount of money you have taken. With a real loan, you pay interest on the full amount you borrow – whether you use it or not. HELOCs are also good for short-term financing needs that arise unexpectedly. This credit line is also a good option for people who own their homes for free and without other loans, allowing them to access cash by simply writing a check against their own funds.
Both types of loans are available in fixed and variable rate versions. On average, the rates for both HEL and HELOC fluctuate around the country’s key interest rate. The key interest rate is the interest rate at which banks lend to their most trusted customers. Obtaining HEL or HELOC from a trusted source is also important, according to the people on the Federal Trade Commission.
According to a recent FTC Consumer Alert posted on www.ftc.gov, “You could lose your home and your money if you borrow from rogue lenders who offer you a high-cost, equity loan. your home. ” Consumer alert indicates that some lenders are targeting homeowners who are elderly or have low incomes or debt problems – and then try to exploit them using misleading practices. According to our country’s leading consumer protection service, here are some methods used by unscrupulous lenders to attract customers:
- Loan reversal: This practice encourages homeowners to refinance their loan repeatedly, often to borrow more money. With each refinancing, the lender charges extra commissions and interest points – something that just increases the debt.
- Insurance package: Here, lenders add credit life, health and accident insurance premiums to the loan, which the borrower may not want or need.
- Bait and switch: In this scenario, the lender offers the consumer a specific set of loan terms and costs at the time of application and then pressures the borrower to accept higher charges when it comes time to actually sign the loan papers.
- Share capital write-off: Here, the lender gives a loan based on the equity in the property and not on the borrower’s ability to repay the loan. If the borrower can not make the payment, he may end up losing his home.
- Non-traditional products: It is not uncommon for lenders to offer loans in which the minimum payment does not cover the principal and interest owed, resulting in an increase in the loan balance and monthly payment. This type of loan, when combined with a variable interest rate, can cause monthly payments to skyrocket if interest rates rise.
- Misleading loan service: In this case, lenders fail to provide accurate or complete account statements or loan repayment information. This practice makes it almost impossible for a borrower to determine exactly how much he has paid or how much he owes.
The Federal Trade Commission also suggests that borrowers ask for explanations for any amount, term or term in dollars that are unclear. Federal law is very specific about what information about credit and loan terms must be provided in writing before consumers apply for a loan or sign any agreements. In addition, the FTC encourages consumers to learn more about equity loans by contacting banks and credit unions in their area. Further, they claim that consumers talk to someone they trust before making any decisions or signing any agreements.
If you believe a rogue lender has taken advantage of you or someone you know, or if you would like to learn more about misleading lending practices, contact the FTC directly. It is easy to reach them at www.ftc.gov or by calling (877) FTC-HELP (1-877-382-4357).
See you at the closing!
Gary Sandler is a full-time broker and president of Gary Sandler Inc., Realtors in Las Cruces. He likes to answer questions and can contact him at 575-642-2292 or Gary@GarySandler.com.