The major downside shared by all second mortgages, home improvement loans and home equity loans is that creditors require the borrowers to use their homes as collateral for the loan.
Once a lender acquires a lien on the property, if the borrower can’t make the monthly payments, the lender can foreclose and take the house, even if the borrower is current with their first mortgage payments.
Home equity loans are often used as a “solution” for people who simply don’t have enough income to repay their unsecured debts, but they all too often result in long-term payments that are beyond their means. This sad fact is all the more tragic when you consider that each state has laws that protect a certain amount of home equity from creditors. In bankruptcy, these laws allow you to discharge your unsecured debts and keep the protected equity in your house. Unfortunately, when people opt not to file bankruptcy but to try and pay off their credit cards or other debts with a home equity loan, they turn dischargeable debt into secured debt. Thus, if they end up having to file bankruptcy later on, they get stuck with a lot of debt that would have been discharged if they hadn’t gotten a home equity loan
Home equity loans are often attractive because they usually offer low interest rates and lower monthly payments, but the total amount of payments often adds up to be much greater than the original amount of debt. The total amount of interest over such a long period of time, usually 15-30 years, can be huge. With the frequently changing economy and unstable job market, home equity loans can quickly turn disastrous for many people. Creditors are willing to offer these lower rates because they know that they can foreclose on the property if the borrower is unable to pay back the loan. Furthermore, when interest rates are low, borrowers are especially susceptible to getting in trouble with home equity loans. Most home equity loans are variable rate loans, and the interest charged by the bank increases as the Federal Reserve Board increases the Prime Rate. As interest rates increase, a once affordable home equity loan payment may sky rocket, making the home equity loan payment unafordable
Home equity loans can be beneficial in the right situation, but people should always consult with an attorney before using their home as collateral and potentially creating a bigger problem in the long term.
Be careful about putting up your valued property as collateral. With high
interest rates and aggressive collections, you might find yourself scrambling to
save your car or personal property. Please feel free to contact us now at
(503) 352-3690 to talk to us about your situation or go to our website.