Refinancing home equity mortgage

Think seriously before you opt for home equity loan

These days, a second mortgage or home equity loan is touted as everything, from the perfect way to consolidate debt to a handy way to pay college tuition, make home improvements or even take a vacation. One company guarantees a "yes" to any and all comers. Hall of Fame sports has-beens smile and crow about friendly terms, on a commercial spot for another creditor.

Think again before you leap at those offers. Too often, borrowers don't get the exact deal as advertised if their credit is less than stellar--a factor that can hinge on something as minor as two late mortgage payments, on down to the declaration of bankruptcy. Not that the banks are looking to pass you by. In fact, many lenders -- Ford Consumer Finance, Delta Funding Corp., Norwest Mortgage Corp., and Countrywide Home Loans Inc., to name a few--have pounced on the market serving individuals with less than top-notch credit as a new source of profits.

Janice Shields, research director at US Public Interest Research Group, a Washington, D.C., consumer watchdog, says many applicants come away surprised at the high rate of interest they're charged. That's not to mention points or fees charged to originate and make the loan, that can climb to as much as 3%-5% of the principal--far beyond the normal 1%.

What's more, you might not find out just how bad things are until it's too late. Lenders don't publicize your credit status according to their standards or the charges tied to your ranking, policies that present a wonderful opportunity to gouge uneducated consumers, says Shields.

You probably have a basic understanding of the steps that determine your credit rating. Generally speaking, it's tied to your history of making payments on debt, including previous mortgage credit history and revolving payments on such items as a boat, a car or credit cards. According to how closely you keep to a payment schedule, you're assigned rankings resemble the grades you got in school, ranging from A, A-,B+, B, B- on down to D.

What you probably don't know is that today, in mortgage industry lingo, everything but the impeccable A rating is judged to be "B & C borrowers" or individuals with impaired credit. And your status doesn't truly come clear until you're handed down the terms of your loan, including interest rates and fees. With the job market looking rougher by the day, and with many consumers tapping into their home equity as a lifeline, that might come too late. "People are being encouraged to get a loan when they could postpone it," says Shields, who adds that many applicants are given their loan, high rates and points on a take-it-or-leave-it basis. "They're told they don't have good credit, and many times they should wait to see if they can get something better."

That's not all. Often a number of hidden fees can pop up just before you sign the dotted line. Lenders might charge a fee to obtain credit documents. A lender may get the document by a courier and charge you the courier fee or, even worse, a fee higher than what they paid the courier. In some cases. those same fees can get tacked on to your loan balance, but may not be disclosed by the lender, in essence forcing you to pay extra interest.

Shields suggests getting every fee disclosed, and confirming everything the lender might try to charge you. "Certainly ask if any fees are included in the loan balance," she says. If a loan officer suggests including fees in your balance if you can't pay for them on the spot, refuse. In addition, walk through all the terms governing late payments. Cases have arisen where some institutions will shorten grace periods to less than a month.

Needless to say, it pays to shop around. Less-than-pristine credit doesn't mean you will not get a loan, nor does it mean that you should pay exorbitant interest rates or fees. Another option: an unsecured home equity loan, meaning you don't have. to put your house up for collateral. Remember, a good lender, once he or she understands your financial situation, should be able to present several scenarios, which include getting a second mortgage, refinancing the first mortgage, getting an adjustable rate loan or simply cashing out the equity in your home.