Do you know the Home Equity Line of Credit Pitfalls?

What is a Home Equity Line Of Credit?

A home equity loan is a loan secured by the equity value of your residence. The interest paid can be tax deductible. You can use a home equity loan to make home improvements, to replace other types of loans that are not tax deductible, and any loans that have higher interest rates.

A home equity line of credit is a revolving credit using your house as collateral for the loan. A home equity lineallows you to be approved for a pre-specified credit limit, which is the maximum amount of money you can draw down against a home.

According to the Federal Reserve Board, "There may be limitations on how you use the line. Some plans may require you to borrow a minimum amount each time you draw on the line (for example, $300) and to keep a minimum amount outstanding. Some plans may also require that you take an initial advance when the line is set up".

It is therefor worthwhile checking with the providers how the home equity line of credit will differ from other lines of credit.

What are some pitfalls to be aware of?

Stripping - when lenders make loans that are difficult for the borrower to repay. They do this because they want to foreclose on the homes and sell them, thereby "stripping" away the home equity for their own profit.
Flipping - tricking victims by "flipping" their original loan several times. This means that instead of foreclosing, the lender offers to refinance.
Packing - lenders will "pack" charges along with the loan i.e. bundle life insurance, regular life insurance and other services into the new mortgages. These additions are usually unnecessary and do not benefit the borrower.

Be sure to compare offerings and look carefully for examples of the pitfalls mentioned above before committing to home equity lines of credit.

This site is for entertainment purposes only. Information has been researched and is as accurate as to the best of our knowledge at time of publication. This article is not to be considered financial advice. If you have any questions about a home equity line of credit, please consult with a registered finance professional.