What to be aware with Home Equity Loans - Help and Information on Home Equity Loans

Be Alert and Aware

Be aware of unfavorable loan terms.

There are several home equity loan terms that can increase your loan costs by much. You need to be aware of these terms, avoid them, and always negotiate the best deal you can. Some terms to be aware of are: credit insurance, a pre-payment penalty, and interest rate increase on late payments.

Even larger and reputable lenders often will not verbally tell you that some of these terms are in your loan offer. You should always read the loan documents in full and ask about these terms.

Credit Insurance
Credit insurance on a home equity loan is always optional. Ask if your loan includes credit insurance. Credit insurance can include items such as credit life insurance, unemployment insurance and disability insurance. Credit life insurance will pay off your home equity loan if you die.

If you think you need credit insurance, your lender is probably not the best place to get it. You should shop with insurance providers and consider alternatives such as traditional life insurance. A life insurance policy is usually cheaper than credit life insurance.

If you decide to get credit insurance from your lender, ask if it covers the full loan amount. Financing the credit insurance, which is called 'single-premium credit insurance', makes it more expensive since you are paying interest on top of the credit insurance.

Credit insurance can usually be cancelled and refunded in full within a certain period of time if you have already accepted it as part of a home equity loan. Contact your state consumer protection office for more information about the cancellation of credit insurance.

Pre-payment Penalty
A pre-payment penalty is a one-time penalty fee paid to the lender if you pay off a home equity loan earlier than planned. A pre-payment penalty provision in a home equity loan is very expensive and a penalty of 10% of the loan amount should not shock you. This means that on a loan of $80,000, you could pay $8,000 if you pay off the loan early.

Two common situations that result in paying off a home equity loan early are the sale of your home for any reason or the refinancing of the loan. If you think there is a possibility that you may sell your home before your home equity loan has expired, you should consider removing the pre-payment penalty provision from your loan agreement. A pre-payment penalty may force you to keep a high interest rate home equity loan by making other options such as refinancing more expensive.

If you ask the lender to remove the pre-payment penalty provision from your loan agreement, the lender may raise the interest rate or increase the points paid at closing. An increase in the points paid is many times a better option than an interest rate increase. Remember that the points paid is a one time fee where as an interest rate increase has a longer and often bigger impact on the total loan cost. When you are presented with the specific options available to remove the pre-payment penalty, some basic calculations will tell you which is the best option. A pre-payment penalty can be very costly. If you think there is a chance you may pay off your loan early, it is probably better to have this condition removed.

Interest Rate Increase in Cases of Default
A loan can have a provision for an increase in interest rates if you miss a payment or if you pay late. The increased interest rate will apply to the rest of the loan term. This can be very expensive if for any reason you miss a loan payment.

Try very hard to negotiate this provision out of your loan agreement. You should be able to find a lender that does not require this provision. If you are forced to have it, make sure you understand exactly what will trigger this interest rate increase and the effects it will have on your loan payments and your ability to make them.

Beware of these shady dealings.

While most home equity loan lenders are reputable and operate within the law, you do need to protect yourself from the abusive lending practices of some unscrupulous lenders. Homeowners, particularly the elderly, minority and those with low incomes or poor credit, should be very careful when borrowing money based on their home equity. This is because exploitative lenders especially target these types of borrowers.

The dishonest lender has many tricks and practices. Please avoid any lender that:

Tells you to falsify information on the loan application. For example, the lender tells you to say that your loan is primarily for business purposes when it's not.
Pressures you into applying for a loan or applying for more money than you need.
Fails to provide required loan disclosures or tells you not to read them.
Pressures you into accepting monthly payments you can't make.
Misrepresents the kind of credit you're getting. For example, calling a one-time loan a line of credit.
Tells you to sign blank forms - the lender says they'll fill them in later.
Promises one set of terms when you apply, and gives you another set of terms to sign - with no legitimate explanation for the change.
Says you can't have copies of documents that you've signed.

You shouldn't be charged excessively high interest rates or fees. Usually, your closing costs should be 5% of your loan amount or less, and your interest rate should be less than 4% to 6% above the prime rate. If you think you are being overcharged, comparison shop with more lenders to make sure that you are not the victim of an unscrupulous lender.

Never accept lender recommendations from home improvement contractors. Never let your lender directly pay your home improvement contractor. Find your lender by actively searching for the best deal and never let your lender find you like in the case of a door-to-door salesman. Never deed your property to anyone without first consulting an lawyer or attorney. Never allow the lender pressure you in any part of the home equity loan process. Always read the entire loan document and never sign documents with any blank spaces where text could be added.

If you have been the victim of a lender, you can should and must file a complaint.