Home Equity Lending Practices to Be Aware of

Home equity lending is complicated because it is a form of subordinate lending. This means your home equity lender will not take the first priority if you have to declare bankruptcy in order to repay all of your debts. Your senior lenders, like your mortgage lender, will take the number one spot. Since the home equity lender is subordinate, these lenders are more likely to attempt to gain an upper hand by making loans less favorable to you. 

Inappropriate Limits

Home equity lenders are more likely to extend you jumbo loans with limits far too high for your income level. Because they are holding a lien on a home, home equity lenders are risking far less with these large loans than those lenders issuing unsecured loans. With the extremely high limits you could quickly find yourself in a loan you cannot afford. It is also possible your home equity lender will attempt to limit your loan to value ratio on your collateral to a level far lower than they should. In this case, you would be putting far more on the line than you are getting in return. Your home equity lender may even want you to default because they would make a large profit on the loan.

Adjustable Rates

A number of home equity loans are extended as lines of credit. This makes the financing very flexible, but you will have to pay for the flexibility with a higher interest rate. In most cases, flexible revolving credit lines actually have variable rates. This makes it a challenge to know how much your loan may cost up front. If your rates stay low, the loan could be a good deal. Unfortunately, this is rarely the case, and variable rate loans often adjusting much higher after an initial introductory period.

Hasty Default Timetables

Home equity lenders protect themselves from charge offs, which are like small credit card defaults, by assessing very high late payment fees and having short timetables for default. This means you may be forced into delinquency or default after being late on just one payment. When you are negotiating your home equity loan contract, pay attention to this part in the terms. Ask what will happen if you are late on a payment and how the avenues to rectify a late payment if one occurs. These protections will be critical in protecting you from foreclosure if you ever have a financial emergency.

Forced Foreclosure

Many borrowers make the mistake of thinking they cannot experience a foreclosure based on a home equity loan, but this is not entirely true. Your mortgage lender does have the primary lien on your home, and you will not face a foreclosure unless your mortgage is in default. However, your home equity lender can actually purchase your mortgage from the primary lender. In doing this, the home equity lender can force you into foreclosure even if you made all your mortgage payments. This is the main route that gets borrowers with high value home equity loans into real debt trouble. Avoid this situation by treating your home equity loan with as much thought as you do your mortgage. 

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