Home equity loans are specific types of loans in which borrowers use their home equity as collateral for their loans. These loans are usually used for larger expenses and projects, for example:
- College tuition;
- Medical expenses;
- Home repair and improvement projects.
A closed-end home equity loan is a one-time, lump-sum payment loan. In the alternative, an open-end home equity loan does not function as an actual loan but, instead, as a lien of credit that is based on the equity in the property.
An open-end home equity loan may also be referred to as a home equity line of credit (HELOC). The repayment terms of a home equity loan are generally negotiated between the lender and the borrower.
In addition, the repayment terms of a closed-end equity loan may be different than those of an open-end loan, which is more similar to a credit card payment. With either option, defaulting on a home equity loan may result in a collections lawsuit, which may negatively affect the borrower.
What Are Mortgages?
Most individuals who are buying a home will need some type of financing to complete the transaction. Typically, this comes in the form of a home loan that is issued by a bank or other lending institution.
A mortgage is the most common type of home loan arrangement. There are numerous different types of mortgages that are available.
Each different type will have different payment plans and interest rates. A mortgage is an arrangement that allows a borrower to make monthly payments on their property to the lender and, eventually, become the owner of the property.
A home loan may also address other aspects of residential properties, for example, a home improvement loan. This type of loan is used for the purpose of repairing or upgrading a home or making additions to a property.
The majority of home loans that are provided, however, are mortgages.
What Legal Issues Are Associated With Home Equity Loans?
In general, a home equity loan is intended to help an individual attain their various financial goals. However, there are risks of a home equity loan, including, but not limited to:
- Overspending: Mismanaging funds through a home equity loan may create additional financial strain for an individual. This hindrance is important to note as the loan will effectively lower the home equity, which could largely defeat the purpose of obtaining this type of loan;
- Lien: A lien allows another party to have an interest or a share in an individual’s property. The lien creates a legal right for a creditor to obtain the property if the borrower fails to repay their debt;
- It is meant to provide security to the individual who is taking out a loan in order to cover their debt and obligations;
- In general, liens are public, and as such, they inform creditors of any existing debts. Drawing a home equity loan may result in a lien being placed on the home, especially if the borrower does not pay back the loan;
- Lenders will commonly levy on a home in order to obtain payment, in some cases, through a foreclosure proceeding;
- Financing a home: Home equity loans can be used to refinance a home in lieu of a regular mortgage. However, they cannot be used to initially purchase the home, for example, when purchasing a second home;
- Refinancing is very similar to the initial securing of a home loan. However, it may provide an individual with more flexibility, which will lead to higher interest rates on their new loan.
A home equity loan presents some considerably unique concerns in terms of home loans. This is mostly because the home’s equity is being used as collateral.
An individual should note that the home’s equity will be diminished by the loan. This depreciation may affect future transactions, for example, the sale of the home or if the individual intends to transfer the home to an heir at a later time.
Are There Any Other Common Legal Issues Associated With Home Equity Loans?
Yes, there are also other common legal issues that are associated with home equity loans, including, but not limited to:
- Contract laws: In general, a home loan must be finalized in written form in order to be considered legally binding. It must also meet all state and local contract law requirements in order to be valid.
- This means that a breach of a home loan agreement is treated as a breach of contract;
- Breaches of home loan agreements frequently result in contract remedies, for example, a monetary damages award;
- Interest rates: Interest rates are a major part of home loans. Some home loans have fixed interest rates, and others involve rates that change over time;
- In terms of how interest rates may become an issue when associated with home equity loans, one example would be increasing interest rates that the borrower cannot keep up with;
- Foreclosure: Failure to keep up with home loan payments may result in foreclosure. However, an individual can generally avoid foreclosure by selecting the right home loan plan as well as by having a home equity lawyer review all of the documents involving their home equity loan; and
- Fraud: Mortgage fraud, or loan fraud, is more common with younger or inexperienced buyers. That is why it is suggested that an individual only work with certified, licensed mortgage representatives who are working for legitimate companies.
There are also other areas of law that may affect a home loan transaction. One example would be how filing for bankruptcy may change an individual’s loan obligation.
A divorce is another example of what may change an individual’s home loan obligations. Whenever a major life change or legal issue arises in an individual’s life, they should keep themselves informed and updated regarding their loan obligations.
What Else Should I Know About Loan Fraud?
Loan fraud is one of the most common examples of what may result in a home equity loan lawsuit. If an individual is a homebuyer, they should be aware of the different ways in which they may be taken advantage of during the home-buying process.
Predatory lending occurs when a financial institution offers a high-interest rate to a loan borrower in exchange for valuable collateral, for example, the deed to their property. If the buyer is not able to pay back their loan in full, the lender will be able to legally take the property and sell it at a much higher value in order to make a profit. This can often happen when the interest-rate is so high.
This is considered fraudulent behavior on the part of the lender if the bank misstated or concealed the terms of the loan. A loan applicant should also be aware of how they can perpetuate loan fraud themselves.
In some cases, a borrower will engage in loan fraud to get approved for more money or to obtain a loan with a lower interest rate. Common examples of mortgage fraud include:
- Exaggerating income in order to receive a bigger loan;
- Claiming that an individual is employed when, in fact, they do not have a job;
- Attempting to avoid higher interest rates by claiming that an individual will occupy the property when the actual intention is to buy it as an investment property.
Do I Need a Lawyer for Help With a Home Equity Loan Lawsuit?
If you have any issues, questions, or concerns or are involved in a home equity loan dispute, it is important to consult with a mortgage lawyer. Your lawyer can advise you of your options related to home equity loans and what the outcome of those loans will be, as well as how they will affect the value of your property.
Your lawyer can also review any documents you may be provided before you sign them. In addition, if a dispute arises, or if you are already involved in a home equity loan dispute, your lawyer will represent you in court and help ensure your rights are protected.
