Home Equity Loan: Scams to Beware of

By: Alan Lim

Before going ahead with a home equity loan it's essential to beware of fraud and scams in the market.

Types of scams

There are several prominent kinds of scams doing the rounds, many of which may entrap unsuspecting borrowers. Here we list out some of them:

&bullEquity stripping: This typically involves a practice whereby even if the borrower doesn't have sufficient income to support monthly payments on the home equity loan the borrower is still lured into securing a loan. The reason? The lender is never interested in the ability of the borrower in making monthly payments. The final objective is to secure the home. Therefore once the borrower is unable to pay the monthly payment on the home equity loan the lender will foreclose thus taking possession of the home and the equity.

&bullHiding terms of the loan/ Balloon payment: This is probably even worse than equity stripping. In such cases, if the borrower is about to face foreclosure due to inability to keep up with monthly home equity loan payments, another lender offers to come to the rescue. In this scheme, the interest rates are lower, which may entice the borrower. However payment towards the home equity loan in such cases will only involve paying towards the interest. On completion of the loan term, the lump sum of the entire principal amount is expected to be paid by the borrower. On failing to pay this amount, the loan is foreclosed and the home is taken possession of by the home equity loan lender.

&bullLoan flipping: This practice is very common. If a homeowner has had a mortgage for quite a few years and wishes to get some extra cash, a lender will promise to do the same by offering a refinancing option. After opting for this refinancing option, once a few payments on the home equity loan is made, the lender will call to offer a bigger loan for a larger expenditure, probably a grand vacation. The borrower goes for refinancing, without knowing that each time he refinances, his debts are shooting up. This is because of rising points and fees on every refinancing.

&bullHome improvement loan: This is probably more of a nightmare than a home improvement scheme. A contractor will offer to remodel and refurbish your home for a reasonable cost. The contractor will also mention that he can get the work done through a lender he knows. Once the work starts, soon after the borrower is asked to sign a host of papers. The papers maybe blank or else maybe asked to be signed in a hurry. The borrower does not get a chance to read the terms and conditions. Only later does he realize it's a home equity loan. The contractor may or may not complete the work on the house as he has no interest now that he has got the borrower's money.

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