DANGERS

  

 

They can be very  

expensive when you 

consider total cost

  

You risk losing your 

home if you default 

on the payments

   

Even if the value  

of your house  

decreases, the 

amount of your  

loan stays the same

That risk is the chief reason to  

be very cautious about using home  

equity borrowing—lines of credit in  

particular—to pay ordinary expenses.  

If you’re using the money to make  

improvements in your home, pay tuition 

bills, or meet other major expenses, and 

include loan repayment as a regular item 

in your budget, home equity borrowing 

can be a wise choice. But if you’re in the 

position of not being able to repay, you’re 

exposing yourself to losing everything 

you’ve invested in your home—and  

having no place to live.

FINDING A LOAN

Home equity loans are generally available. 

Banks offer them, and so do credit unions, 

mortgage bankers, brokerage houses, and 

insurance companies. 

You can start by checking rates and 

terms advertised in the newspaper and 

making some phone calls to see what’s 

available. But before you commit your- 

self, you should get a description—in 

writing—of the rates, the term, and the 

other conditions of the loan. 

SETTING THE RATE

Each lender sets the terms and conditions 

of loans it makes, though the basic ele-

ments are usually similar. If the loan has  

a variable rate, it must be tied, or pegged, 

to a specific public index. The lender 

adds a 

margin, often several percentage 

points, to the index to determine the new 

rate each time it’s adjusted. It may hap-

pen once a year or sometimes more often. 

REVERSE MORTGAGES

For older people with lots of equity but 

limited income, a 

reverse mortgage  

may seem to be an appealing alternative 

to selling their home. A reverse mortgage 

allows owners to borrow against the value 

of their home, so that they can continue  

to live there. The loan does not have to  

be repaid until the home is no longer  

the borrower’s primary residence. How- 

ever, the borrower must pay insurance  

premiums and real estate taxes to keep 

the loan in good standing.

You can apply for insured reverse 

mortgages through lenders who are ap-

proved to offer Home Equity Conversion 

Mortgages (HECMs) backed by the 

Federal Housing Administration (FHA) 

or from a limited number of other private 

lenders. The amount you can borrow 

depends on your home’s appraised value, 

the current interest rate, the age of the 

youngest borrower, and the amount of the 

initial mortgage insurance premium. In 

addition, FHA lenders impose caps on the 

amount they will lend.

While interest rates quoted on reverse 

mortgages can be similar to those for 

other mortgages, there are additional  

fees and charges that can make them 

more expensive than other types of loans. 

Lenders must provide a “Total Annual 

Loan Cost” disclosure that estimates the 

average annual cost as a percentage of the 

loan, and borrowers must be counseled  

by a HECM approved counselor. You can 

find a list at www.hud.gov or by calling 

800-569-4287. 

Regulations enacted in 2013 to protect 

both borrowers and the FHA require a 

financial assessment before a loan is 

approved and an escrow account in some 

cases. They also limit the amount that can 

be withdrawn in the first year of the loan.

BORROWER BEWARE

Tapping your home’s equity to pay down debt 

or purchase things you couldn’t otherwise 

afford is usually a recipe for disaster, as many 

homeowners with large outstanding loans dis-

covered during the financial crisis that began 

in 2008. If you need evidence that you should 

learn from other people’s mistakes, this is it.

HOME FINANCE

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