"Federal law requires you be given more information and special protections if your loan is a 'high rate, high fee loan'— a refinancing loan secured by your home or a second mortgage with an interest rate that is at least 10 percentage points higher than the rates on Treasury securities of the same maturity.

For instance, if the rate on a 30-year Treasury security is 6.27%, any second mortgage or refinancing with a rate of 16.27% or higher will trigger the requirement. If the lender violates the law, you may have up to three years to cancel the loan and you may sue the lender for violating the law.

On high rate, high fee loans, in addition to written notice of your three-day right of recission, you must be given a warning notice that you could lose your home and any equity built up in your home. "

Also banned by law for this type loan are balloon payments, higher interest charges because of late payment, negative amortization, and a few other things.

But a key issue is, don't trust contractors who knock on your door telling you about needed home repairs especially if they recommend a lender to finance the work. Sometimes dishonest lenders work with building contractors to deceive home owners.

Contact the appropriate licensing agency and ask if there are any complaints or disciplinary actions against a contractor you are thinking of working with. Only 36 states require contractors to be licensed. If you live in a state with no license requirement, call your district attorney, consumer protection office and the Better Business Bureau to see if they have received any complaints.

     Home Equity Loan Fraud and Bad Choices

Per Consumer Action, "In most cases, it is legal for someone who lends you money secured by your home to seize your home if you do not make all the payments on time. Because of this, dishonest individuals have found ways to rip off home owners with high rate, high fee home loans that are impossible to repay."

"... we need to remind consumers that they are dealing with their home equity. The price of default is the loss of their home. With any second mortgage, they (the consumer) should realize what they are getting into. The basic qualification is whether you can afford the payments."

The key to making a sound decision on a home equity is a matter of knowing your own self discipline. If the loan is to pay off high interest debt and then you continue to accumulate more debt, you are taking a major chance of losing your home. If you do not have the self discipline to tear up your credit cards and vow to operate on a cash basis only, my recommendation is never consider a home equity loan. Find another way. Even if it is an emergency, find another way! Either find another way or accept the fact that the time left in your home is now limited because you will be losing it to your lack of self-discipline.

     Negative Equity

One of the worst financial tools I have seen is Negative Equity. Lenders at times will let you borrow up to 125% of your home value. For example, if your home is valued at $150,000 and you borrow your equity based upon 125% of the value of your home, you are facing a mortgage balance of $187,500 ... $37,500 more that the house is worth. What if you have to move due to job relocation, or health issues, or scores of other reasons that force thousands to move annually. You certainly won't be selling the house for $187,500 especially after Real Estate commission, closing costs, fix up, etc.

In my own article Negative Equity and Reverse Mortgage, I stated that, "this major financial shift potentially alters the property owners degree of fiscal responsibility since it alters the previous traditional 10-20% stake in the property. Additionally, this market is so huge that appraisals are accomplished not formally as previously required, but by drive-by rough gauge of market value. Driving this recklessness is a projected $7 billion earning from negative equity loans in 1997 alone."

Circumstances have not changed since. 

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