If you’ve looked into getting a mortgage in the past few years, you know that standards have changed dramatically. Rates are higher than they’ve been in decades, and loan programs are more restrictive than ever. That means it takes a lot of work to find the right bank or lender willing to take on your risk.
That also means that many lenders aren’t interested in giving you any loans. Fortunately, most banks offer a home equity line of credit (HELOC) as an alternative. With a HELOC, you can borrow against the value of your home rather than having to get a mortgage or other loan from a bank.
But before you even think about applying for one, you need to understand these changes that have made borrowing harder than ever before. That’s why we’re going over some common lending practices that require borrowers to repay their loans in full every month rather Hence, if you plan on getting one at all, it’s important to learn about these scare tactics lenders use to drive up your monthly payments and demand repayment sooner rather than later.
What is a Home Equity Loan?
A home equity loan is a lump sum that can be drawn from the value of your home. In other words, rather than getting a mortgage and then repaying it with monthly payments, you can borrow against your home and pay back the cash all at once.
The most important thing to remember about HELOCs: these loans are dangerous! Scary things happen when you don’t pay your lender back on time, such as an immediate interest rate reduction or a late charge. This means you should only borrow what you need to live comfortably – not more than that.
A Conventional Loan for Refinancing
A conventional loan is a loan that requires borrowers to repay their loans in full every month. A monthly payment of $2,500 would be required in order to repay the loan over its duration of 36 months, which is equivalent to 12 monthly payments.
Many lenders offer these types of loans because they’re less risky for them. But if you don’t have the money to pay back a high-interest loan in a short period of time and you need a temporary solution until you can get your finances in order, it may not be best for you.
But before you take out this type of loan, be sure to read all the fine print as there are many traps that may make your situation more difficult than it needs to be.
A No-Doc Loan
One of the most common lending practices is to require no documentation. This means that lenders don’t need to verify your income or credit score. In fact, these types of loans are often marketed as a way for borrowers to get money without any risk. However, this practice has caused an epidemic of people defaulting on their loans and leaving lenders with more than $50 billion in bad debt. This can be bad news for you if you decided to take out a HELOC from a lender that takes no-doc loans.
Private Mortgage Insurance (PMI)
This is one of the most common ways lenders try to get you to repay your loan in full every month.
It’s important to understand that PMI isn’t a guarantee, even though it can be expensive. It’s basically a way for banks to make more money, and it doesn’t always result in lower interest rates. So, if you have the budget, don’t feel like you need it on your HELOC.
This one is a biggie. If you’re refinancing or buying a home with a conventional loan, mortgage insurance premiums will be required. These premiums are usually added on to the loan cost, and payments can be as high as $200-300 per month. The problem is that these premiums are based on the value of your home, not the size of the loan. So if a lender were to loan you $150,000 for your new home purchase, that would only mean an additional payment of $50 per month in insurance fees. However, when you request a HELOC, those fees go away. Not only that, but because you’re borrowing against your home equity rather than borrowing from another source like a bank or credit card company, lenders are much more open to approving loans for zero down financing so long as your income is high enough to support it.
The Scary Sticker Shock Summons
When you apply for a loan, lenders may ask you to put down a certain amount of money upfront. Sometimes, they will also ask you to provide proof that your income is sufficient to cover your monthly payments.
The loan application process can be daunting and time-consuming, but if you’re applying for a loan and have any doubts, you should double-check the estimate from your lender on how much your monthly payment would be.
Many lenders use these kinds of estimates to scare potential borrowers into thinking they’ll lose their house if they don’t pay up. That’s why it’s important to understand where these estimates come from and what the real numbers are for making minimum payments on your loan under each scenario.
The Payoff Amount Summons
The first tactic that many lenders use is the payoff amount. A loan with a higher payoff amount is generally seen as riskier. Some companies will demand repayment from borrowers in full every month, and if you don’t pay them back on time, they’ll charge you an even larger fee called “late fees.” If you think the lender is going to take it easy on you, they’re not. The late fees are usually around $250. That’s a lot of money!
In addition to the payoff amount increasing your monthly payment, most lenders also require that your loan must be repaid in full every month. There’s no room for error here: if you miss just one payment, they could cancel your loan at any moment. This can lead to an immediate financial disaster for anyone who doesn’t make payments on time–especially those with low income and/or high debt levels.
The Final Summons: The Order Requirement Summons
Your lender may require you to make monthly payments, but they’re not giving you a loan. They’re requiring you to pay them in order to get a loan. The Final Summons is an example of this type of loan agreement.
This type of loan can be difficult to get out from under and typically requires borrowers to make at least six months of payments before they can break the agreement. In other words, if your lender agrees to give you a loan, it will require that you make monthly payments for six months with no interest or any other fees attached. After those six months, your lender will forgive the debt as long as you repay the principal and interest for at least one more month. However, if your payments stop during those three months without repaying the principal and interest, it’s likely that your lender will foreclose on your home and sell it off to recoup their losses.
Since there are no fees associated with the Final Summons agreement, this type of lender will often only require half of what they would normally charge in order for them to approve a cash advance. Many people find that this is easier for them than getting a traditional bank loan because their monthly payment is less expensive than what they’d have to pay otherwise.