Tag: HELOC

“Borrow From Yourself” LOL

~ Carolyn Warren ~ 6 Comments

I saw an ad by a bank that headlined “Borrow From Yourself.” It was an ad for a home equity line of credit.

How deceptive!

If you truly borrow from yourself, you would take money from your own source — your own savings account or investment account.

You would pay back yourself.

You would choose to charge yourself interest or not. If so, the interest would go to yourself. LOL

When you take out a home equity line of credit (HELOC), you are securing the loan on your house. You are using some of your precious home equity to take a loan FROM THE BANK.

Who do you make the payments to? The bank.

Who collects the interest charged? The bank.

Dear Bank: Stop running deceptive ads that make homeowners think your loan is borrowing from themselves.

By the way, HELOCs are up 12% this year. Why? Because of advertising. It is not because more homeowners need more HELOCs. People are falling prey to ads like this.

Banks and credit unions are desperate for loans now that interest rates are up, and refinances are no longer happening. They can only get a limited amount of purchase loans, which are also becoming more scarce.

So in their desperation for business, they are advertising HELOCs like crazy. Don’t fall for the ads!

You don’t need to gobble up your precious home equity to get money for something you really cannot afford right now.

WARNING! What’s more, if you have an open HELOC — even if the balance is $0 — you cannot qualify for the lowest interest rate when you want to refinance. You must actually close the HELOC entirely first, if you want the lowest interest rate.

WARNING #2! Watch for prepayment penalties on the HELOC. In California, prepayment penalties are the norm, and some of them are horrible! Such as the California credit union that charged $2,000 prepay penalty to close a HELOC with a $0 balance.

In WA state, it is illegal to put a prepayment penalty on a HELOC. Find out the law for your state before signing for a HELOC.

Always ask, “Show me where it says there is no prepayment penalty.” Don’t take their word for it, because there have been plenty of liars who have deceived borrowers who didn’t read all the verbiage before signing.

Thanks for reading and being diligent for what you believe and what you sign!

Should You Get a Home Equity Loan (HELOC)?

~ Carolyn Warren ~ 2 Comments

Now that home values have risen, some people are asking about taking out a Home Equity Line of Credit, a type of second mortgage.

In general, I am against home owners taking out a HELOC. It wasn’t that long ago that thousands of home owners who had spent their precious equity on a HELOC found themselves in foreclosure. And consequently, with severely damaged credit.

Now is not the time to make that same mistake all over again.

Of course, that doesn’t stop the greedy banks from pushing this product.

I will allow that there is the rare valid reason to take out a HELOC, such as when you want to increase your wealth in real estate by purchasing another home or when you have a failed roof.

On the other hand, using your property as a piggy bank is a bad idea.

Reasons NOT to Take Out a HELOC

I am opposed to increasing the debt on your primary residence for the following purposes.

1) Home improvements: If you can’t afford it, wait until you save the cash. Why? Because a $50,000 remodel does not increase your home value by $50,000. You come out behind financially.

On top of that, you pay back more than $50,000 due to the high interest rates.

2) Consolidating debt: This is a big no! You never roll plastic (credit card debt) into your precious real estate. This is one of the worst financial mistakes home owners made in the past. Don’t repeat it.

If you get your credit card shut down, it’s no big deal. If you get kicked out of your house, it’s a very big deal.

3) Education: Take out a student loan if needed. Never pay for school with your house. That goes double for your kids’ education!

4) Care-taking: I believe in compassion and generosity, but you do not go into debt and spend your equity in order to take care of someone’s medical bills, dying wish, or funeral expenses.

5) Vacation: To the loan officer who suggests this, you reply, “No, I am not stupid.”

6) Open for a Safety Net: A HELOC does not make a good safety net. It is quite the opposite. A bank can reduce or shut down a HELOC at any time. The interest rate can go up, often with a lifetime cap of 19%. This does not provide you with financial safety. Create a savings account for safety. Find a secondary source of income for safety.

A Little-Known Fact and a Warning

Most home owners don’t know that if they have a HELOC (or any type of second mortgage that was opened after purchasing the home) and then want to refinance, that HELOC will put them into a higher credit risk category — even if they have perfect credit and a 800 score.

That’s right, you will pay a higher interest rate simply for having a HELOC when you refinance.

Exercise Patience

We live in an age of instant gratification and entitlement. Listen folks: you do not “need” granite counter tops or a bathroom makeover. Sure, those things are wonderful to have, but exercise patience and save your money until you can actually afford to purchase them.

 

Disturbing New Trend Puts Home Owners at Risk

~ Carolyn Warren ~ 3 Comments

tootsie-hitI am disturbed by a new trend. I am disturbed that so many home owners haven’t learned from the mistakes of the past and are making those same financial blunders again.

I’m talking about people using their homes like a piggy bank. Like children in a candy store, they can’t wait to spend their property value on pretty new kitchens, hardwood floors, sunken tubs, sun rooms, and other desires.

This is exactly what happened in the boom years of 2004 to 2006. Home owners were doing cash-out refinances and taking second mortgages called a Home Equity Line of Credit (HELOC) in order to fund wants. Then to their shock and dismay, when values declined, they had no equity left. Their piggy banks were empty.  What’s more, when their incomes declined, they could no longer afford the extra payment on the second mortgage.

Now that values have risen in many parts of the country, new stats show that taking cash out is hot again. Home owners are signing for HELOCs and spending their equity on home improvements.

They justify their desires by saying the improvements will increase the value of their homes. That’s a good line that loan officers use in order to sell loans. Unfortunately, the facts don’t support it. Real figures show that what people spend remodeling their kitchen is more than the increased value of their home. The same goes for the other home improvements.

Reality Check: A remodeled bathroom or kitchen is not “an investment.” You don’t get back more money than you put in.

When you can afford to pay cash for an upgrade, then go for it. By all means, enjoy the luxury. But be smart. Don’t repeat the regrettable mistakes of the past. Don’t take out a loan to buy something that is a want and not a need.

Greed has been defined as having an unrealistic expectation. It is unrealistic to think you can take your equity, spend it, then pay interest to the bank that enabled you to take the loan, and come out ahead.

Better to be patient and prudent by saving up cash until you can truly afford that pretty new upgrade you want.

 

Government Raises Fee Limit for Home Equity Loans

~ Carolyn Warren ~ Leave a comment

money hundredsThe Home Equity Protection Act, just like it sounds, is supposed to prevent lenders from gobbling up your precious home equity with high fees. It is a law that limits how much banks and other mortgage lenders can charge you. This is especially relevant when the loan is small, such as the popular Home Equity Loan that many home owners use for remodeling or making home improvements.

Now the Consumer Financial Protection Bureau is raising the limit banks can charge you. Makes you wonder who this government agency is really protecting, doesn’t it?

The fee limit for a home equity loan in 1994 was $400. Last year in 2013, the limit was $625. All loan applications received on or after January 10, 2014 will have an increased fee limit of $1,000.

Of course, it is up to the individual bank and lender to decide whether or not to charge the limit. When shopping for a home equity loan, be sure to ask what the fee is. If they say $1,000, you know they are charging the maximum allowed by law. I advise shopping three lenders before deciding.

For a home equity or other small loan, I would look at a mid-size or small local bank, a credit union, and the bank I currently do business with. Don’t make the mistake of blindly taking the first loan offered.

In addition to the fee charged for a home equity loan, you also need to find out the following:

* Is there a prepayment penalty? If so, what are the terms?

* How does the adjustable rate work? What is the maximum the rate can go up to at the first adjustment? At each adjustment thereafter? The lifetime max?

* Is there an annual fee?

For more valuable information about home mortgage loans, please see  Mortgage Rip-Offs and Money Savers.

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I recommend the paperback copy over the Kindle, because the Good Faith Estimate forms are too difficult to read in the ebook format.

“If you’re considering getting a mortgage, read this to see what’s going on behind the scenes.”  Posted November 8, 2013 by Lovelylight, user name