When Not To Agree To A Home Equity Loan

Before you borrow money on your home's equity, think twice so you don't end up paying more than you expected.

According to the Federal Trade Commission, homeowners-particularly elderly, minority and those with low incomes or poor credit should be careful when borrowing money based on their home equity. Certain abusive or exploitative lenders target these borrowers, who unwittingly may be putting their home on the line. Abusive lending practices range from equity stripping and loan flipping to hiding loan terms and packing a loan with extra charges.

When not to agree to a home equity loan:

- If you don't have enough income to make the monthly payments.

- If the loan terms are incredibly unfavorable to you, with enormous up-front costs and high interest rates (sometimes exceeding 50 percent).

- If there are discrepancies between the promised or stated interest rate and the annual percentage rate (APR) figure required in all consumer loan contracts (Truth in Lending). If that figure is significantly higher than the rate stated in the contract, the loan contains hidden interest charges.

- If you can’t determine who the lender is. A lender could be nothing more than a few individuals in for a quick score. Does the agent have an office? Is the company an old and established one with community ties?

- If you haven’t read or if you don’t understand the loan terms or you’re being pressured into signing the loan document.

- If the loan includes extra products you don't want.

What to do before you Agree to a home equity loan:

Have a financial adviser such as an attorney or accountant review all papers before signing anything. Paperwork for a loan contract is often technical and unclear. Read all items carefully. If you need an explanation of any terms or conditions, talk to someone you can trust, such as a knowledgeable family member or an attorney. Keep careful records of what you've paid, including billing statements and cancelled checks. Consider all the costs of financing before you agree to a loan.