Home Equity Scams

If you already own a home, you've probably received many offers for home equity loans and lines of credit:

A home equity loan is a loan secured against your home. It is a loan in addition to your existing mortgage.
A line of credit is also secured against your home. However, you are not issued a check – you have access to funds up to the limit of the line of credit.
A line of credit is, in many ways, similar to a credit card. It is a revolving line of credit. You can borrow money and pay it back as many times as you need to during the term of the loan.

Although home equity can be an excellent source of funds, you should exercise caution when taking out a home equity loan or line of credit. Because they are secured against your home, you could lose your home to foreclosure if you don't make the payments on your loan.

Before you accept an offer for a home equity loan or line of credit, make sure you know the terms of the loan and if there are prepayment penalties. Home equity loans are often structured as 10- or 15-year loans – that's a long time to pay it back. If you use the funds for a new car or a vacation, the car will need to be replaced and your vacation memories will be long gone.

Moreover, while homes in most markets appreciate in value over time, leaving your appreciation intact is an excellent way of saving for college and your retirement.

If you need to use your asset – your home – for some important family event – such as a medical emergency or sending a child to college – shop around for a mortgage that is fairly priced, with fair terms and fair marketing.

Prepayment Penalty Mortgages

Some consumers may be misinformed about the terms of a prepayment penalty mortgage (PPM). In order to avoid feeling trapped in a PPM, you should consider the following information before you make a choice.

A prepayment penalty mortgage requires that you pay a prepayment penalty or fee (a percentage of the unpaid principal balance) if you repay your entire loan – or a substantial portion of it – within a certain period of time. Generally, you will be offered a lower interest rate on your mortgage in exchange.

Prepayment penalty mortgages have several advantages for borrowers. They include:

Possible cost savings benefits of reduced fees or closing costs
Possible lower interest rates

These mortgages have disadvantages, too. If you pay off your mortgage debt before it is due or if you choose to refinance your loan, you may owe a prepayment penalty.

Prepayment penalty mortgages are a borrower's choice, never a requirement. Choosing a prepayment penalty mortgage is a personal decision that depends on both your current financial situation and how long you think you'll keep your mortgage before refinancing or making a large payment against it.

You should be aware, however, that predatory lending practices can include prepayment penalty mortgages.

So, before you choose a prepayment penalty mortgage, ask your lenders several questions as you consider the pros and cons of a prepayment penalty mortgage.

Always be sure to research all of your options when you look for the mortgage that's right for you. Your lender should be available to answer all of your questions and help you make an informed decision.



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Ginnie Mae


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