Home Equity Loans and Lines of Credit

If you’re thinking about getting a home equity loan or home equity line of credit, shop around and compare options. Compare financing terms offered by banks, savings and loans, credit unions and mortgage companies. Shopping around and comparing different options can help you get better terms and a more affordable deal, which is important when financing is secured by the value of your home.

Using your home as collateral

What does it mean to use my home as collateral?

You use your home as collateral when you borrow money and “guarantee” the financing with the equity in your home. This means that if you don’t repay the financing, the lender can keep your home to pay off your debt.

Refinancing a home, getting a second mortgage, taking out a home equity loan or a home equity line of credit (HELOC) are common ways people use their home as collateral to obtain home equity financing. But if you can’t repay the financing, you could lose your home and any mortgage amortization you’ve accumulated. The accumulated amortization on your home mortgage is the difference between what you owe on your mortgage and how much money you could get for your home if you sold it. High interest rates, finance charges, and other credit and closing costs can also drive up the cost of borrowing money, even if you use your home as collateral.

How can I reduce the risks of taking out a loan by putting my house up as collateral?

Consider your options and your budget. Be aware of the risks involved in using your home as security or collateral. If you can’t pay the money back, you could lose your home to foreclosure. Talk to a lawyer, financial advisor, or someone else you trust before making any decisions. There are dishonest lenders trying to target seniors, low-income homeowners, and credit-challenged borrowers as clients. They offer them financing based on their mortgage amortization, and not based on their ability to pay the balance owed. If you fall behind on your payments, the lender may try to declare your financing delinquent and send you a notice of delinquency, which is usually the first step in the foreclosure process .

What are the warning signs that you are dealing with a dishonest lender?

Dishonest lenders may contact you to offer you a supposedly convenient financing deal. They might say that your credit history doesn’t matter. They will try to pressure you into accepting more expensive deals with less favorable terms and will pressure you to commit before giving you a chance to investigate and consider other options. You need to know that legit lenders will give you the time you need to review the terms of the offer in writing, and they want you to understand them. They will never ask you to sign blank documents or hide key facts and terms from you.

Here are some general rules for spotting and avoiding dishonest lenders:

  • Avoid any lender who wants you to borrow more than you need.
  • Do not deal with any lender who wants you to obtain financing with higher monthly payments than you can comfortably afford.
  • Never deal with a lender who wants you to lie on a loan application, for example, saying you have more income than you actually do.
  • Avoid lenders who tell you to sign blank forms. If they fill in the blanks later, you won’t know what data they entered.
  • Never deal with a lender who tells you that you can’t get copies of the documents you signed. Of course he can.
  • Don’t deal with any lender who tells you not to read the financing information document. The law states that you must receive a document disclosing the details of the financing agreement, so make sure you get it and also make sure you read and understand it before you sign the financing.
  • And be sure to avoid any lender that promises you one deal when you apply but gives you different terms at the time of signing without any explanation for that change.

Home Equity Loans

What is a home equity loan?

A home equity loan, also known as a second mortgage, is a loan that is secured by your home . You receive the loan for a specific amount of money and must repay it over a set period of time. Typically, you repay the loan by making equal monthly payments over a set period of time. If you can’t repay the loan as agreed, you could lose your home to foreclosure .

The amount of your loan, and the interest rate you’ll pay to take out the loan, depends on your income, credit history, and the market value of your home. Many lenders prefer that you borrow no more than 80 percent of the mortgage payment on your home.

How do you find a home equity loan?

Consider contacting your current lender to see what type of home equity loan they offer. They may be willing to offer you convenient interest rates or fees. Ask your friends and family for recommendations of lenders. Then, do some research on the various lender offerings and be prepared to negotiate the deal that best fits your situation. Use the Home Equity Loan Worksheet.

  • Ask each lender to explain the loan plans available to you. Read the FAQs on shopping, comparing, and choosing a mortgage for tips on how to talk to lenders and brokers, and how to compare the terms of their offers. If you don’t understand the terms and conditions of the loan, ask questions because it could mean higher costs. Some of the important factors you should learn more about are:
    • The APR: The Annual Percentage Rate (APR) is the most important factor to compare when shopping for a home equity loan. The APR is the total cost you pay for credit, expressed in terms of an annual rate. Generally, the lower the APR, the lower the cost of the loan. The APR includes the interest rate, but also includes points, broker commissions and other charges, expressed as an annual rate. Each point is a fee equal to one percent of the loan amount. Knowing the APR will make it easier for you to compare “apples to apples” when considering different offers.
    • Balloon Payment: This is a payment that is usually due at the end of the loan and is often much higher than your usual monthly payment. Balloon payments are common in so-called “interest only” loans where your monthly payments go toward paying interest and you don’t pay any of the principal. Find out if the terms of your loan state that you’ll need to make a balloon payment. If you can’t pay it off when the time comes, you may have to get and pay off another loan to meet that balloon payment, which means you’ll start the mortgage process all over again and pay costs, points, and fees again.
    • Prepayment Penalty: Some loan agreements include a penalty if you pay off your loan early or if you refinance. If the penalty is too high, you may have to keep a loan with a high interest rate because it would be too expensive to pay it off.
    • Credit insurance: If you buy credit insurance, the insurance will pay your loan payments in the event you become ill, disabled, or die. But if you already have life or disability insurance, then you already have similar protection. Lenders must tell you if credit insurance is required for your loan; Otherwise, they can’t be included in your loan unless you volunteer, they give you a statement of the credit insurance costs, and you sign the papers to buy it. If you don’t want to take credit insurance, don’t buy it; if it’s already included in the loan document when it’s presented to you for your signature, tell them to drop that fee.
  • Ask about your credit score. Credit scoring is a system used by credit grantors to help them determine whether or not to give you credit. Information about your bill payment history, the number and type of accounts you have, late payments, collection actions, outstanding debts, and the age of your accounts are data used to predict how likely you are to repay the loan and do it on time.
  • Negotiate with more than one lender. Don’t be afraid to create competition between lenders and brokers by telling them you’re looking for the best deal. Ask each lender to lower your points, fees, or interest rate. And ask them to match—or better—the terms and conditions of other lenders.
  • Before you sign, read the loan closing documents carefully. If the loan isn’t what you expected or wanted, don’t sign it. Negotiate to have the changes you want made or walk away. Generally, you also have the right to cancel a home equity loan for any reason (and without penalty) within three days of signing the loan documents. For more information, see The Three-Day Cancellation Rule .
  • Don’t transfer money in response to unexpected emails. You could receive an email, purportedly from your loan officer or real estate professional, saying there was a last-minute change. You may be asked to transfer money to cover closing costs to a different account. Don’t do it: it’s a scam. If you receive such an email, contact your lender, broker, or real estate professional using a phone number or email that you know is genuine and tell them what happened. Scammers often ask for payment methods that will hinder your chances of getting your money back. Regardless of how you paid a scammer, it’s best to act as soon as possible. See more information on how to get your money back .

Three Day Cancellation Rule

What is the Three Day Cancellation Rule?

This federal rule gives you three business days, including Saturdays but NOT Sundays, to reconsider a signed credit agreement that is secured by your primary residence and allows you to cancel the agreement without penalty or penalty. The Three-Day Cancellation Rule applies to many home equity loans (and also applies to home equity lines of credit, see below).

You can cancel for any reason, but only if you are using your primary residence as collateral. It can be a house, condominium, a mobile home or a boat that you use as a home. The right to cancel does not apply to a vacation home or a secondary residence.

Under the Rule, how much time do I have to cancel?

You have until midnight on the third business day to pay off your loan. The first day starts running after all three of the following events occur:

  • You sign the loan at closing.
  • You receive an information form required by the Truth in Lending Operations Act that contains key information about the credit agreement, including the APR rate, finance charge, amount financed and payment schedule.
  • You receive two copies of a Truth in Lending Act Notice explaining your right to cancel.

If you did not receive the information form or two copies of the notice, or if the information document or notice contained errors, you have up to three years to cancel.

How do I determine the third business day?

You can receive the information document and the two copies of the notice of your right to cancel at the closing of the loan transaction. In that case, the first day starts counting from the closing. But if you receive the information form and both copies of the notice before or after the closing, the first day begins when the last of the three events occurred. For example, the closing occurs on a Friday, and that was the last event, you have time to cancel until the following Tuesday at midnight. But if you received the Truth in Lending Act information form on a Tuesday and you signed for the loan on a Friday, but you did not receive the two copies of the notice of your right to cancel until Saturday, then you have time to cancel until midnight of the following Wednesday.

During this three-day waiting period, the lender cannot take any action related to the loan directly or through another person. The lender cannot deliver the loan money (it can only do so to an escrow account), nor start providing services. If it is a home improvement loan, the contractor cannot deliver any materials or start work. The lender may start charging finance charges during the waiting period.

What steps should I take if I want to cancel?

You must tell the provider in writing that you want to cancel:

  • You must deliver or mail your notice in writing by midnight of the third business day .
  • You cannot cancel over the phone or in person with the lender.

Will I owe anything on the contract if I cancel it during the three-day waiting period?

If you cancel the contract, the lender’s title or lien on your property is also cancelled, your home is no longer collateral and cannot be used to pay the lender. You do not have to pay anything, and you should be reimbursed for any amounts you would have paid, including the finance charge and any other fees, such as application, appraisal, or title search fees, whether you paid them to the lender or to another company that was part of the credit transaction. After receiving your notice of cancellation, the lender has a period of 20 days to return all the money or goods that you had given him as payment as part of the transaction and to release any property or pledge interest in your house as warranty; and must do both

If you received money or property from the lender, you can keep it until the lender proves your home is no longer used as collateral and returns any money you paid. Then you must offer to return the lender’s money or property. If the lender doesn’t claim the money or property within 20 days, you can keep it.

Under the Rule, can I waive my right to cancel the contract?

If you have a personal financial emergency, such as home damage from a storm or other natural disaster, you can waive your right to cancel. That waiver eliminates the three-day waiting period so you can get the money sooner. To waive your right:

  • You must send the provider a written statement describing the emergency and stating that you waive your right to cancel.
  • The statement must be dated and signed by you and anyone else who shares ownership of the home.

Your right of cancellation gives you a little more time to think about putting up your home as collateral and can help you avoid losing your home to foreclosure. If you have a personal financial emergency, you can waive this right, but before you waive, make sure it’s really what you want to do.

Are there exceptions to the Three Day Cancellation Rule?

Yes, the federal rule does not apply in all situations where you use your home as collateral. Exceptions apply when:

  • Apply for a loan to initially purchase or build your primary residence.
  • You refinance your loan with the same lender and you don’t borrow any additional funds (but if you borrow more funds, the rule applies and you can cancel).
  • The provider is a state agency.