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Risks Inherent in the New Home Equity Loans

Published by sam - 11/09/07 - 03:09:16 am

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This is a continuation of the previous post.

The kind of home equity loan that offers you a revolving line of credit can easily tempt you to use it irresponsibility for unnecessary and unaffordable goods and services—much as some borrowers use credit cards—or for high risk activities such as going into business or investing in the stock market.  The important distinction between home equity debt and credit card or other forms of debts, however is that the home equity debt exposed your home to foreclose whereas other forms of debt do not.

If you default on automobile loan, the lender can repossess the automobile.  If you default on personal or credit card loans, the creditor can place a lien against your home or even force you to declare personal bankruptcy.  Although a loan prevents you from selling your home before satisfying the debt, it does not disposed you of it, and most state bankruptcy, person’s home against claims creditors.

But home equity loans do not afford the borrowers any such protection.  If, for example, you have a $25,000 first mortgage and $75,000 second mortgage or home equity loan and you default on your payments at a time of severe weakness in the real estate market, foreclosure and a forced sale may not yield a net price of more than $90,000.  In that circumstance, after the first mortgage (which has priority) is paid off, you will still owe the lender an additional $10,000.  And you will be homeless.

The Home equity Loan Consumer Protection Act of 1988 now provides some safeguards for consumers.  Previously, lenders could base an equity loan’s variable rate on the bank’s own cost of funds index or other internal index.  Since the bank controlled that index, it could manipulate the home equity loan’s variable rate.  Now banks have to base a variable equity loan rate on an outside public index not controlled by the bank.  The Act also requires that ads trumpeting very low (and temporary) introductory or “teaser” rates on equity loans also display the regular rate as prominently.  In addition, lenders must disclose certain information about rates, fees, and any limits on the consumers borrowing rights.

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3 Comment »

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  1. hey, this is a pretty good article you have written here. it has a lot of information in it

    Comment por TheWild1 — September 11, 2007 #

  2. Hi Wild,

    Thanks for your comment. I’ve been putting so much effort on this blog but my traffic is still too small*laughs*..my opportunity cost is starting to get too high to ignore*laughs*..anyway..i will still continue posting new articles and hopefully things will get OK soon.

    Thanks again for the comment.

    Sam

    Comment por sam — September 11, 2007 #

  3. yeah i know how it is.. i am working on it too.. but im sure after some time it will eventually pay off

    Comment por thewild1 — September 12, 2007 #

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