Are Home Equity Line of Credit Loans Fraudulent?

A home equity loan is a type of second mortgage secured by the equity in your home. Many homeowners will be attracted to this type of loan based on low advertised interest rates and use them to pay off debt or for other major expenses. Sadly, the advertising of these types of loans hides much of the truth and requires a ton of energy to understand the pitfalls behind them.

Today, I thought I would share a recent experience of applying for one of these loans. I saw an advertisement for a 7.5% interest rate that turned out to be highly misleading. What is hidden from the advertisement is the plethora of fees piled onto the loan. If a person is looking for money, they aren't automatically wired to think about having to pay lots of fees upfront.

In the scenario I investigated, the property value was around $379,000, according to recent appraisals. The goal was a loan for $220,000. Below is a breakdown of just origination fees:

• Loan Amount (points) $275
• Processing fee $1,125
• Underwriting fee: 175

Of course, there are other fees associated with this type of loan including, but not limited to:

• Appraisal fee: $645 (The property was appraised several months back at a cost of $200)
• Credit Report $100 (For most borrowers, you can pull your own credit report at no cost)
• Flood Determination Fee $6 (FEMA provides this information at no cost)
• Flood Life of Loan Coverage $3
• Life of Loan Tax Service $48 (You can't pay your property taxes directly to your municipality)
• MERS Registration Fee $25

In other words another $831 of fees on top of the origination charges of $1,175 are added. Now, on top of that, there are still more fees to be added:

• Tax Certification Fee $25
• Title - Abstract or Title Search $195 (There are literally tons of people on Fivver that perform this service for a total cost of $5)
• Title - Lenders Title Policy - $487 (Even though you may already have title insurance on the property, they will want you to purchase it again)
• Title - Settlement Closing Fee $625

So, adding up the $831 plus the $1,175 plus the above charges comes to $3948 in fees. But we are not done with fees just yet. You have to pay for the transaction and recording fees with adds in another $274. Once we add in property tax, your total closing costs will be up to $8,197.

So, if you wanted to borrow $220,000, you would receive only $211,803 at closing unless, of course, there are other fees that may be dreamt up that I may not know about.

The funny thing is that many of the lenders that advertise home equity line of credit loans don't even hold the loans on their books and will often sell them to someone else via or , which have strict rules for maximum interest rates and origination points. This results in taking many of the fees and hiding them elsewhere. This is often a transparency gap that is not disclosed upfront.

Ever heard the phrase: Death by a Thousand Cuts. Let the buyer beware of being murdered by a laundry list of undisclosed fees. Sadly, there is little regulation to stop this type of behavior and hence why I will be working very hard to champion legislation in my State of Connecticut to bring an end to this type of consumer exploitation.