Home Equity Scams to Watch Out For

Arming yourself with information is the best way to protect yourself from some common home equity scams.

Who isn't looking for ways to get extra cash? Our costs of living continue to increase while we look for ways to stretch our paychecks. A home equity loan can provide needed supplementary funds; but if you choose this route, get a deal that fits your needs and budget, and be sure to avoid some common scams.

Equity stripping and flipping

Equity stripping occurs when lenders steal the equity you've built up in your home. The lender calls a potential borrower who may need money for bills. The borrower doesn't have enough income to qualify for the home equity loan, but the lender "helps" him by padding his income. As a result, he walks away with a loan he can't afford, and the lender can foreclose when the homeowner doesn't make payments. Another method unscrupulous lenders use is the balloon payment, whereby they offer to refinance a home with initial monthly payments lower than the homeowner's current ones. The final payment of the loan is the entire principal due. When the owner can't pay it, the lender forecloses.

Another scam is called loan flipping, when the same lender offers multiple refinances. Each time the borrower refinances, the interest rate increases-and so do the closing costs and fees. While the borrower might be tempted by the extra cash she receives initially, she'll end up paying far more during the term of the loan.

Be wary if a home improvement contractor offers you "easy" financing for a project you can't afford. Most contractor financing is legitimate, but if he rushes you to sign a document, you could be signing away your equity for a high interest, high fee home equity loan.

Look for hidden costs

Another form of abuse is when lenders add exorbitant hidden fees at closing. When you're loan shopping, it can be frustrating to comparison shop because each lender may use different terminology for the same fee. One way to protect yourself is to ask for a complete listing of all fees for the lender's proposed loan. While a line-by-line comparison may not be possible, look at the totals and ask questions, if one fee seems much higher than others.

If you're purchasing a home, ask your real estate agent to provide you with the HUD Settlement statement before the day of the closing. Compare the costs to the estimate of closing costs that your lender provided. If the costs have increased by more than 10 percent, ask questions.

Home equity loans can provide many benefits to consumers when they're handled by reputable lenders. But as with any type of consumer fraud or shady business practice, you should keep yourself informed, read through all of the paperwork carefully, and ask questions when something looks suspicious. This can prevent you from becoming the latest home equity scam victim.