How to Avoid Home Equity Scams

Unscrupulous lenders use home equity scams to separate you from your hard-earned money. Avoid becoming a victim by being on the look out for the following five deceptive practices.

Equity stripping occurs when the lender gives you a loan based on the equity in your home, not on your ability to repay the loan based on your income and current financial situation. A common result is that homeowners default on the loan and the lender takes the house as collateral.

Lenders that have you refinancing your loan and borrowing more money are practicing what's called "loan flipping." Each time you refinance you are paying additional fees and interest points, which increases your debt. While refinancing can be a legitimate way to save money, continuously refinancing costs you money since the interest rates on your mortgage will not have changed significantly between each refinance period.

Understanding what you are paying for in your loan will help you to avoid credit insurance packing. Again, credit insurance is a legitimate product; it insures your loan in situations like loss of job or death. But if your lender adds it onto your loan unnecessarily, you are paying for a service you don't need. One way to avoid this problem is to purchase credit insurance from a reputable third party.

At times lenders may offer special terms when you apply for your loan, but pressure you to agree to more costly terms when you come in to sign the paperwork. This is a bait and switch tactic, but one that can be avoided if you know and understand the terms of the loan. Be sure you don't sign an agreement for a loan if you are confused about the terms or if they seem different than originally explained. Federal law states that written credit and loan term information must be provided when you apply for a loan and before you sign a contract.

Deceptive loan servicing occurs when the lender doesn't give you accurate or complete account statements and payoff figures. This means it will be difficult, if not impossible, for you to figure out how much of the loan you have repaid and how much you still owe. When this happens it is very easy to overpay on the loan.

In addition to arming yourself with knowledge, be sure to shop around for the best loan terms and interest rates. Consult a financial advisor, your local Fair Housing Office, legal aid, or any senior services organization before getting a loan.

Sources: Myers Internet Services, www.mortgagefaq.com; www.doityourself.com

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