HELOC scams / predatory stuff to look out for?
December 22, 2021 12:05 PM Subscribe
We're signing a HELOC later today. Obviously I'm on the lookout for getting over-extended. But aside from that, are there things to look out for? We're getting it from a legit bank (PenFed); we called them first on the recommendation of a few people. But I remember stories from 2009 about predatory loan behavior and want to know if there's a good list of what to look for as I read the documents today. Thanks!
Best answer: Two issues come to mind. Both occurred in 2008, but are perennial problems with home mortgages and HELOCs.
1. Lenders approving loans for people who would not be able to repay them.
2. Lenders offering very low introductory interest rates that later increase dramatically. This makes the monthly mortgage payment affordable at the outset, but a few years down the line, when the rate adjusts, it becomes unaffordable. The lenders might say, "Oh, you'll just sell the property or refinance. You'll never have to pay that rate." But if the value of the property goes down or other conditions change, you may have to change that rate.
To avoid these problems, you just need to be very clear and honest with yourself about what you can afford. You also need to understand the terms of the loan. If the interest rate changes, is there a cap on how high it can go? Things like that.
Good luck!
posted by Winnie the Proust at 3:23 PM on December 22, 2021
1. Lenders approving loans for people who would not be able to repay them.
2. Lenders offering very low introductory interest rates that later increase dramatically. This makes the monthly mortgage payment affordable at the outset, but a few years down the line, when the rate adjusts, it becomes unaffordable. The lenders might say, "Oh, you'll just sell the property or refinance. You'll never have to pay that rate." But if the value of the property goes down or other conditions change, you may have to change that rate.
To avoid these problems, you just need to be very clear and honest with yourself about what you can afford. You also need to understand the terms of the loan. If the interest rate changes, is there a cap on how high it can go? Things like that.
Good luck!
posted by Winnie the Proust at 3:23 PM on December 22, 2021
Response by poster: Thanks! This was very reassuring and echoed what some people in person told us. Appreciate it!
posted by slidell at 6:02 PM on December 23, 2021
posted by slidell at 6:02 PM on December 23, 2021
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That being said, make sure you have a legit bank, a legitimate need and trust your ability to pay it back even if something negative happens (like job loss), and that you are not trading dischargable debt (can be erased in bankruptcy) for debt that cannot: ie: depending on where you live it can be a bad idea to take a HELOC to pay off credit card debt, but improving your house or paying for college is good idea. And that the interest rate is fair, ie: below 4%.
Generally it should not have any pre-payment penalties, or a laddering interest rate that rises above 4%.
posted by The_Vegetables at 1:20 PM on December 22, 2021 [2 favorites]