Financial tips & tricks @ CashBuzz.com » What to Look Out for When Considering a Home Equity Loan

By John Campbell

Home equity loans can be very risky propositions. If you have any problems paying off the loan, your home could be in danger of becoming the property of the lender.

Anytime you use your home as collateral, you’re taking a risk. How much of a risk depends on your own personal financial situation. If you think making a home equity loan payment could ever be a potential issue, you should avoid getting one.

Even if you’re relatively certain that a home equity loan can help you out and be easily paid off along with your other bills you still need to be very careful. Unscrupulous lenders and even outright fraudsters can turn some much needed cash on the side into a financial nightmare for you if you don’t know what you’re getting into.

The first thing you need to watch out for are lenders making wild and outrageous claims that sound just too good to be true. If a lender promises to finance any loan regardless of your credit history or promises to refinance your loan at better rates in the future are some early warning signs that you may be dealing with a bad lender. You may pay very high fees to get a loan with bad credit and it may also cost you an arm and a leg to refinance, even though you might get what on paper appears to be a better interest rate.

Before you even begin shopping around for a loan you should have your home independently appraised. . That way you’ll have be able to get an honest professional opinion as to the current value of your home and will be able to avoid getting too large of a loan from a lender who happens to appraise your home for much more than it’s actually worth. You should also get a copy of your credit report and see what kind of interest rates are being offered to people with similar credit scores. This is when you can begin doing some comparison shopping to ensure you won’t get a raw deal by jumping on the first loan offered to you. Remember to factor in your monthly payments as well as the overall cost of the loan to ensure you’re getting the best all around deal.

When you begin talking to potential lenders, avoid those that try to pressure you into a loan you may not be ready for. If a lender is being “pushy” that may mean the lender really has something to hide and doesn’t want you to do your homework before deciding that you want a particular loan. Also avoid giving out any personal information unless you’re dealing with a lender face-to-face. With a vast amount of fraud currently being generated over the Internet, you never want to give your social security number or other sensitive data to an anonymous individual.

When you finally find a lender that seems to offer a good loan at a reasonable price, next comes the tricky part of maneuvering through all the paperwork. This is where you could lose the supposedly good deal, if you don’t read all the fine print. Beware of prepayment penalty clauses or you’ll be penalized for paying off your loan early. You should also avoid agreeing to pay loan fees totaling more than 3 percent of the financed amount of the loan, or 4 percent in the case of FHA or VA loans. Any credit insurance premiums you may be required to pay to protect the lender from any losses if you fail to pay off the loan should also never be financed into the loan as a lump-sum payment. This will increase the overall cost of your loan and cost you potentially more money in the long run. If you pay off the loan early, you’ll also have to pay off insurance that is never used. You’ll be wasting your money.

When signing your loan paperwork, don’t falsify any information even if the lender tells you to with a wink and a nudge. Also never sign any loan documents if there are blank pages or spaces where additional loan terms could be added after the fact. Once you’ve signed the dotted line, it may be very difficult to prove deception on the part of a lender employing such underhanded tactics.

Remember, just because you may have signed a loan agreement it isn’t legally binding for three days. If you discover something unfavorable in your loan agreement within that time frame you can legally back out of the agreement without penalty.

Do your homework and know your rights and you’ll be able to get the best home equity loan for your own particular situation.

John Campbell is the writer and editor of CashBuzz, A financial portal for the rest of us. Check out cashbuzz.com for the latest articles on money management and tips and tricks that can help improve your finances. This article may be reprinted on your Web site if the copyright, author information and active link are included.