Basically, your homes equity is determined
by taking the value of your home and subtracting any other mortgages or liens
secured by the home. A home equity loan is a financial product that allows
a borrower to use the home as collateral for a loan. There are two basic types
of home equity loans: first mortgages and secondary mortgages. A first mortgage
is a loan secured by a home that has no other mortgage against it. It is generally
the loan you take out to purchase or refinance the home. A secondary mortgage
is simply a loan secured by a home that has at least one other mortgage or
lien. Home improvement loans are often secondary mortgages.
Although taking out a loan using your home can be beneficial, beware of lenders who may tempt you with a loan that you cannot repay. Often, these lenders offer products that carry high interest rates, heavy fees, may be designed in a way that causes you to fall behind on the note, and it may have a large balloon payment come due at the end of the term. If you fall behind, or fail to be able to make or refinance the payment on your note, the lender can take your home by way of foreclosure. Once foreclosure begins, most people never get their homes back. If you are a homeowner with equity, you are a potential target for this type of fraud. Knowing what to look for and how to protect yourself can keep you from losing a home.
Home improvement contracts are another potentially troublesome area. Problems can appear when consumers make large up-front payments to contractors, who in turn do not finish the work or who use materials left over from other jobs.
Consider these factors when looking at putting your equity up for collateral.
1. Can I afford this loan?
Just because you qualify for a loan does not necessarily mean you can really afford one. If you cannot afford to make the monthly payments, you are at greater risk of losing your home.
2. What will I do if I lose my home?
Most people don't have another place to go if they lose their homes. If you have to buy a smaller house or rent an apartment, you'll need a down payment or a deposit.
Carefully investigate all the possibilities before you decide to obtain a second mortgage or home equity loan.
Take advantage of the free information available from nonprofit organizations and governmental agencies (see the resource list). It is easier to learn to protect yourself now than rebuild your equity and credit rating later.
Even if you have signed a contract, you do have a limited amount of time to change your mind. You must act fast, however, if you want to undo a loan agreement. Texas law gives you three business days from the date you sign a home equity or high cost home loan contract to cancel the loan if your home is the collateral. You can cancel for any reason at all, but must do so in writing within the three days.
OCCC Consumer Helpline: 800.538.1579
Texas Office of the Attorney General
Consumer Protection Hotline: 800.252.8011
Federal Trade Commission
Consumer Response Center: 877.382.4357
U.S. Dept. of Housing & Urban Development
Main number: 202.708.1112
Texas Dept. of Housing & Community Affairs
Program hotline: 800.792.1119
Texas State Affordable Housing Corp.
Main number: 888.638.3555
National Foundation for Credit Counselors
Counselor Locations (English): 800.388.2227
Counselor Locations (Spanish): 800.682.9832