Home Equity Loan Scams

Because of rising home values, homeowners across the nation are taking advantage of their equity, and putting the money to good use. However, before contacting a mortgage lender and discussing home equity options, consider the following equity scams, and learn how you can be alert to such schemes.

1. Equity Stripping

Before a home equity loan or home equity line of credit (HELOC) is approved, homeowners are required to complete a loan application and wait for an approval notification. For the most part, lenders approve homeowners for an affordable amount, regardless of how much equity their home has gained. These honest lenders attempt to help homeowners avoid possible foreclosure. On the other hand, some mortgage lenders want the applicant’s home to foreclose. This way, the lender is able to reclaim the property, and the homeowner loses their equity.

This common tactic is called equity stripping. In the nutshell, the mortgage lender approves the homeowner for a high home equity loan. This decision is not based on the borrower’s ability to afford or repay the loan. Because many homeowners are easily tempted by dollar signs, they become easy targets. Unfortunately, once the home equity loan is obtained, and the homeowner is unable to maintain payments, the mortgage lender forecloses and re-sells for a huge profit.

Equity stripping can be easily avoided. For starters, always acquire home equity quotes from multiple lenders. Furthermore, avoid borrowing too much money. Even if the home equity lender approves you for a ridiculously high amount based on your home’s equity, be cautious. Regardless of whether a homeowner maintains regular payments on their first mortgage, the second lien holder (home equity lender) has the power to claim the property if payments stop.

2. Bait and Switch

A common practice with mortgage, refinance, and home equity loans, this tactic involves the mortgage lender offering one set of loan terms, and than switching the terms at the loan closing. Because the switch is very last minute, many homeowners feel pressure to comply with the new terms. This usually includes a higher interest rate and higher loan fees. In this situation, homeowners should walk away from the deal, and find a trustworthy lender.

3. Multiple Refinancing

Rising home market values have some homeowners seeing dollar signs. Thus, many use this as the opportunity to refinance and payoff debts. Refinancing and borrowing money from your home’s equity is a great idea. However, homeowners must avoid borrowing too much. Furthermore, several mortgage lenders have a way of convincing homeowners to refinance multiple times. By do so, homeowners incur a higher debt and decrease their equity. If home values were to decline or plateau, many homeowners will owe more than their home’s worth.