September 21st, 2021 4:43 PM by Jackie A. Graves
If you need money to pay bills or make home improvements, and think the answer is in refinancing, a second mortgage, or a home equity loan, consider your options carefully. If you can't make the payments, you could lose your home as well as the equity you've built up.
Talk to an attorney, financial advisor, or someone else you trust before you make any decisions about borrowing money using your home as collateral.
Early Warning Signs
Don’t let anyone talk you into using your home as collateral to borrow money you may not be able to pay back. High interest rates and credit costs can make it very expensive to borrow money, even if you use your home as collateral. Not all loans or lenders (known as “creditors”) are created equal. Some unscrupulous creditors target older or low income homeowners and people with credit problems. These creditors may offer loans based on the equity in your home, not on your ability to repay the loan.
Avoid any creditor who:
Protecting Your Home and Equity
Here are some steps you can take to protect your home and the equity you've built up in it when you are looking for a loan.
Costs can vary greatly. Contact several creditors, including banks, savings and loans, credit unions, and mortgage companies. Ask each creditor about the best loan you would qualify for. Compare:
Generally, the creditor or mortgage broker will give you a written Good Faith Estimate that lists charges and fees you must pay at closing, and the creditor will give you a Truth in Lending Disclosure that lists the monthly payment, the APR, and other loan terms. If you don't get these d, ask for them. That makes it easier to compare terms from different creditors.
Once You’ve Chosen a Creditor
Negotiate. It never hurts to ask if the creditor will lower the APR, take out a charge you don't want to pay, or remove a loan term that you don't like.
Ask the creditor for a blank copy of the form(s) you will sign at closing. While they don't have to give them to you, most honest creditors will. Take the forms home and review them with someone you trust. Ask the creditor about items you don't understand.
Ask the creditor to give you copies of the actual documents that you'll be asked to sign. The creditor may not have to give you all of the actual filled in documents before closing, but it doesn't hurt to ask.
Be sure you can afford the loan. Do the math. Figure out whether your monthly income is enough to cover each monthly payment, in addition to your other monthly bills and expenses. If it isn't, you could lose your home and your equity — through foreclosure or a forced sale.
If you’re refinancing the original mortgage on the property, ask about escrow services. Does the loan's monthly payment include an escrow amount for property taxes and homeowner's insurance? If not, be sure to budget for those amounts, too.
Before you sign anything, ask for an explanation of any dollar amount, term or condition that you don't understand.
Ask if any of the loan terms you were promised before closing have changed. Don't sign a loan agreement if the terms differ from what you understood them to be. For example, a creditor should not promise a specific APR and then — without good reason — increase it at closing. If the terms are different, negotiate for what you were promised. If you can't get it, be prepared to walk away and take your business elsewhere.
Before leaving the creditor, make sure you get a copy of the documents you signed. They contain important information about your rights and obligations.
Don't initial or sign anything saying you're buying voluntary credit insurance unless you really want to buy it.
Most home equity borrowers have at least three business days after closing to cancel the deal. This is known as your right of "rescission." In some situations (ask your attorney), you may have up to three years to cancel. To cancel the loan, you have to tell the creditor in writing. Send your letter by certified mail and ask for a return receipt. That will allow you to document what the creditor received and when. Keep copies of your correspondence and any enclosures. After you cancel, the creditor has 20 days to return the money or property you paid to anyone as part of the credit transaction and release any security interest in your home. Then, you have to offer to return the creditor's money or property, which may mean getting a new loan from another creditor.
High-Rate, High-Fee Loans
You may have additional rights under the Home Ownership and Equity Protection Act (HOEPA) if your loan is a home equity loan, second mortgage, or refinance secured by your principal residence and if:
You may have additional rights if your loan is used to buy a home (but not for the initial construction of your home, or for a temporary loan of 12 months or less), a home equity loan, a second mortgage, or a refinance secured by your principal residence and if:
If you think your creditor has violated the law, you may wish to contact the creditor or loan servicer to register your concerns. At the same time, you may want to contact an attorney, your state Attorney General's office or banking regulatory agency, or the Federal Trade Commission.
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