Legal Bonds: Home Equity Lines of Credit May Not Be Your Friend!

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Furthering the discussion on whether the credit agencies are using a flawed algorithm to determine our mortgage future, this comment from Dallas bankruptcy attorney Reed Allmand, Allmand Law, deserves its own post. Most homeowners who are underwater on their mortgages got there through home equity loans that Allmand says were used to retire the same type of debt you find on credit cards. And that is what got so very many people into a financial mess. Me, I remember Texas when you could not borrow one dime against your home to protect the homestead:

I disagree with the premise that the Experian algorithm is flawed by classifying a Home Equity Loan as a Consumer Credit Loan. Before the state legislature changed the law to allow Home Equity Loans, the only type of debt that could impair a homestead was a purchase money loan (a traditional mortgage loan), a mechanic’s/materialman’s lien, child support lien, or a IRS tax lien. The argument for allowing home equity loans was to allow consumers to cash out the equity in their property and encumber their homestead with a new debt so they could use the proceeds as they please.

The consumer then uses home equity loan proceeds to make consumer purchases or retire other debt. Unlike a purchase money loan (traditional mortgage) the consumer is not borrowing money to pay off a piece of real estate and build equity in that property. Instead, they are cashing equity in a piece of property to make consumer purchases. This most often is a sign of economic instability in my line of work.

I am a Board Certified Consumer Bankruptcy attorney and I have seen too many clients enter into a home equity loan they should not have. Many times these loans are used to pay off credit card debt. If the consumer had not paid off the credit card they might go into default and possibly be sued but they could not have their home foreclosed on. That is not the case when a home equity loan is used to pay off credit cards, because if the consumer defaults on the home equity loan payments they are subject to foreclosure. I have counseled many clients in this situation and would definitely advise consumers to think twice before getting a home equity loan.

Reed Allmand is a board-certified Dallas bankruptcy attorney and principle at Allmand Law.

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Candy Evans

A real estate muckraker, Candy Evans is one of the nation’s leading real estate reporters. She is also the North Texas real estate editor for Forbes.com, CultureMap Dallas, Modern Luxury Dallas, & the Katy Trail Weekly. Candy has written for Joel Kotkin’s The New Geography, Inman Real Estate News, plus a host of national sites. Constantly breaking celebrity real estate news, she scooped former president George W. Bush's Dallas home in 2008. She is the founder and publisher of her signature CandysDirt.com, and SecondShelters.com, devoted to the vacation home market. Her verticals have won many awards, including Best Blog by the venerable National Association of Real Estate Editors, one of the nation’s oldest and most prestigious journalism associations. Candy holds an active Texas real estate license but does not sell. She is on the Board of Directors of Braemar Hotels & Resorts (BHR).

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Comments

  1. dormand says

    I would suggest that Mr. Allmand is starting with an invalid premise when he assumes that all fundings from home equity loans are used to retire credit card indebtedness,

    Certainly SOME home equity loans are used for this purpose.

    Many, however, use all of the proceeds to improve one's peraonal residence by remodeling or updating that home. I suggest that this is not a case of fritterina away capital.

    Another very commonly used application for proceeds from a home equity loan is to pay tuition for children to attend an outstanding private school in cases in which the local public school has outcomes below what the parents' asperations for their children are.

    While the latter application may not add one fathing of value to the family residence, it most likely will allow those children to reach a higher level of their own personal potential and thus stand a far greater chance of absolute independence when they become adults. As they observe theit peers moving back into their childhood bedroom to live with the parents, many may feel that they wished that they had become more productive and thus better able to secure a job which would allow more independence/.

  2. dormand says

    I would suggest that Mr. Allmand is starting with an invalid premise when he assumes that all fundings from home equity loans are used to retire credit card indebtedness,

    Certainly SOME home equity loans are used for this purpose.

    Many, however, use all of the proceeds to improve one's peraonal residence by remodeling or updating that home. I suggest that this is not a case of fritterina away capital.

    Another very commonly used application for proceeds from a home equity loan is to pay tuition for children to attend an outstanding private school in cases in which the local public school has outcomes below what the parents' asperations for their children are.

    While the latter application may not add one fathing of value to the family residence, it most likely will allow those children to reach a higher level of their own personal potential and thus stand a far greater chance of absolute independence when they become adults. As they observe theit peers moving back into their childhood bedroom to live with the parents, many may feel that they wished that they had become more productive and thus better able to secure a job which would allow more independence/.

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  1. […] you if you want to use the equity you have invested a long time building up in your residence.A house equity loan is a loan that is primarily based on the difference in between the assessed appe…re cards as the curiosity rates presented for home equity loans are typically reduce than these […]

  2. […] you if you want to use the equity you have invested a long time building up in your residence.A house equity loan is a loan that is primarily based on the difference in between the assessed appe…re cards as the curiosity rates presented for home equity loans are typically reduce than these […]

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