Protect Yourself
Against Predatory Lending..."The Equity Killer"
A Key To Wealth Building
Predatory Lending is the equity killer. Consumers can lose equity in their homes by being placed in higher rates than they qualify for, by paying junk fees that are financed in the loan, by being placed in bad loan programs, etc. Predatory Lending, simply stated, is the practice of unfair lending. Predatory Lending victimizes hundreds of thousands of families every year. For the past 3 years Fair Community Lending Services has worked to protect consumers against predatory lending through education, access and accountability.
So what is Equity?
Equity is your ownership in the property you own also known as your asset position. A mortgage is your liability. So as shown in Example 1, if your home is worth $300,000 and you owe $200,000 to the bank, the equity remaining in your home is $100,000. Your equity is available for you to turn to cash by either selling your home or refinancing your home.
Example 1:
Value of Home: $300,000
Liability/Amount owed to Bank: $200,000
Equity = Value of Home – Amount owed/Liability: $100,000
If you decide to sell your home you will have to pay off the amount owed to the bank and any remaining money would come to you after you pay the fees to sell your home.
You can also gain access to your equity by refinancing your home. Refinancing your home means you work with a bank or broker to take out a new loan on your home. The existing lender would have to be paid off through the refinance, and you receive a new rate and new program. You will also pay loan fees to the bank or broker to establish the new loan.
How do you gain equity and how does Predatory Lending affect that equity?
Equity is gained two different ways. You gain equity by paying down your loan and through market appreciation. Appreciation happens when the price or value of your home go up. Please see an example of appreciation in Example 2.
Example 2:
You purchase your home in January 2006 for $400,000. After 5 years the value of your home goes up to $600,000. You owe the bank $300,000 so the equity remaining in your home is $300,000.
Equity is also gained through paying principal on the loan. So, if you take out a mortgage that requires you to pay the fully amortized payment, you will pay principal and interest. The principal portion of the payment pays down the loan and the interest is the cost of the loan. As shown in Example 3, the higher your rate the more interest you pay and the longer it takes you to pay down the loan on your home.
Example 3:
| Loan Amount: $300,000 |
Loan Amount: $300,000 |
| Interest Rate: 7% |
Interest Rate: 9% |
| Total Payment: $1,995.91 |
Total Payment: $2,413.87 |
| Total principal paid after 1-year: $3,047.47 |
Total principal paid after 1-year: $2,049.61 |
| Total interest paid after 1- year: $20,903.45 |
Total Interest paid after 1-year: 26,916.83 |
Example 3 shows you that the higher your rate, the longer it can take to pay down your loan and gain equity. You will pay over $6,000 more in interest every year at the higher interest rate loan.
Your first home is the key to your financial security and based on your interest rate, loan program and fees charged for the loan, you can position yourself to maximize on the growth of your equity. |
