A home equity loan is a convenient way to pay for emergencies or other large expenses, like college or home improvements. Unfortunately, some lenders, appraisers and even contractors will take advantage of you by scamming you. The best way to protect yourself is to be aware of the tactics they use.
Bait and Switch
In this scam, the lender offers attractive terms when you initially apply, but your final paperwork includes higher fees or interest rates. Your lender then pressures you to accept the new terms in order to get the money.
Home equity loans don't necessarily require credit insurance, but some lenders routinely include it or other insurance products in the loan paperwork without telling you. If you try to get it removed, the lender tries to stop you, often saying that all the paperwork will need rewriting, so you'll have to wait to get your money. If you do need insurance, shop around. You can usually get a better deal somewhere else.
This scam involves presenting a homeowner, often one facing foreclosure, with attractively low, affordable monthly payments. What the lender doesn't say is that the payments only cover interest on the loan. At the end of the loan term, you will need to repay all of the principle at once. If you can't pay, the lender can foreclose. Interest-only loans can be legitimate, but only if you know what you are getting.
The lender bases your loan amount only on your equity, regardless of your ability to repay it. Some even talk to into inflating your income on your application to qualify. If you can't afford the resulting monthly payments, which is likely, the lender forecloses, stripping you any equity you had.
Home Improvement Loans
A common scam involves a contractor who offers you a good deal on a major construction project and then offers to arrange financing, too. The paperwork for this "financing deal" is often long and confusing, hiding the fact that you will be paying high fees and interest rates. When you can't afford it, the lender forecloses.
This scam involves your lender getting you to repeatedly refinance your loan. It may even offer you a larger loan, so you can get extra cash for emergencies. With each refinance, you pay high points, fees and possibly even a prepayment penalty, further increasing the loan balance. Your interest rates can also increase. Eventually, you won't be able to afford the payments and the lender will foreclose.
Deceptive Loan Servicing
Your lender does not accurately disclose your loan terms, giving you inaccurate, incomplete or vague information. It may even suddenly inform you that your payments are going to be higher than you thought. These tactics make if hard to know how much you really owe and how much you've paid toward your principle.
Signing Over Your Deed
Some lenders will contact homeowners facing foreclosure from a different lender and offer refinancing. The catch is that they ask you to temporarily sign your deed over to them to avoid foreclosure until the refinancing paperwork is ready. The new "lender" has no intention of refinancing. It now owns your home and you become a tenant. The new owner may consider you previous mortgage payment as rent and can evict you if you can't pay. It may also sell the house or borrow against it. Federal credit laws regulate lenders and many of these tactics violate those laws. Protect yourself by recognizing these scams, and never sign any paperwork you don't understand, don't agree with or that contains blank spaces.