While the majority of home equity loan products are not only good for the homeowners, but also for the lenders, there are many types of loans that use equity that can be high risk and in many cases fraudulent. Here are some tips to protect yourself.

As with all financial dealings, make sure you do business with a reputable company, or if the company is not known to you, research it by checking with the Better Business Bureau or other government agency’s.

Besides normal fraud, you should be aware of specific types of loans that can be high risk especially for those that are not healthy financially. They include balloon loans and high LTV loans.

Balloon Loans With normal loans, you pay both the principle and interest over the course of the loan (15 years or 30 years). However with a balloon loan, you only pay the principle throughout the course of the loan. The last payment of the loan however is the entire interest payment. While these loans have their purposes, specifically if you are not planning on living in a home for longer than the loan length, they can be extremely risky for those that do not have reserves. For instance, the last payment in many cases can be tens of thousands of dollars or more.

High LTV Loans LTV stands for loan to value ratio. It is the appraised value of the home compared to the amount of debt owned on a home. For instance, if your current home is appraised at $300,000, you have only $25,000 left on your mortgage and you would like to borrow $25,000 in a home equity loan, this would be viewed as a low LTV loan. However, some lenders allow you to borrow up to 125% of your home’s value. So a loan on a home worth $300,000 with a mortgage of $25,000 left, borrowing $300,000 would make this a high risk High LTV loan. The reason that it is high risk is that if the value of the home drops in price, neither the homeowner nor the bank would be able to recoup their loss on the loan.

For the most part, a home equity loan or line of credit can be a savvy way to borrow large sums of money with relatively low risk, but you should always be alert for loans that might be more harmful than helpful for your specific situation.

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