Mortgage Loan Pitfalls
When the tax law changed to eliminate tax deductions for interest on the majority of consumer purchases (this happened in 1996, by the way) the Home Equity Loan was born (otherwise known as Mortgage Loans) because the interest that one paid on home equity loans was still exempt from the blossoming law for up to 100k for jointly filing taxpayers making marriage a dandy write-off.
In the world of mortgage loans there are two types of loans: fixed and variable rate. The rates can range anywhere from five years all the way to thirty. With your fixed loans the monthly principal as well as the interest will remain the same. The adjustable rate loans typically begin lower making your monthly payments smaller at first but will climb up, gradually, to a predetermined “cap” dependant on current market conditions.
Lending institutions will crawl all over themselves to offer up mortgage loans to a consumer because they’re secured by actual tangible assets so if you fail paying off your note they can walk on in and grab your car or take your house. They will then turn around and sell it off to recoup the money they are out. Basically taking your stuff as collateral minimizes their risks. They also enjoy the extra money form the interest rates since you’re paying roughly 3X the actual loan amount by the time it’s finished with.
Now you can always cash out the equity of your home, typically up to 125% above the value. Though it sounds good right now you are entering certain waters that can see you drowning in more debt over time.
Avoid reloading. Mortgage loans and cashing out your equity is very appealing. You can pay off your debts and your credit cards freeing up all of that money so you can go off spending again getting back into that boat. You create what is known as accelerated borrowing by paying off a debt to use it to pay off another debt, creating even more of the same. Doing so takes away your collateral. When that happens and your job gets rid of you or your income decreases or markets plummet then you can face foreclosure. Debt consolidation is a pitfall all its own as you’re making an unsecured debt a secured one which puts the home in jeopardy.
Being in debt is a hardship. With hardships come people waiting to take advantage of you, offering you the moon to remove the debt. Scammers are all over. These people will target older people, persons with low income or bad credit holders. They will base their loans on the home equity rather than your ability to repay. Never falsify information. Never go with anyone who doesn’t provide disclosures or those who tell you to not worry about reading them. Avoid those who promise you one thing then it’s different in the paperwork.
Home Equity Loans can be useful. They’re easier to get than other loans and, if handled correctly, can pay off early without hurting yourself in the long run.