5 Misconceptions about Home Equity Lending

In a commentary posted on Management, our CEO, Richard Gallagher discusses the top 5 misconceptions about home equity lending. There are two types of home equity lending, closed-end home equity and open-end or home equity line of credit. The goes into more depth and how your credit union can ensure your members understand the top 5 misconceptions about home equity lending.

Here’s how you can clarify the situation and avoid confusion-related mistakes.

Home equity loans are a great way for your members to get money for needed expenses like home repairs or college tuition. They can also be used for things like vacations or new cars. The two types of home equity lending—closed-end home equity and open-end or home equity line of credit—each have marked differences. Misconceptions abound, in part because the two are so closely related. False assumptions are made by homeowners, which can result in mistakes being made by the lender. Let’s look at five common misconceptions and issues you can easily avoid.

1. The loan can’t be modified. While it is true that closed-end home equity loans cannot be modified, the same cannot be said for home equity lines of credit. The limit on the line of credit is based on the value of the owner’s home. If the value drops due to market conditions, the lender may have the right to adjust the amount of available credit accordingly. Not explaining this clearly upfront could spell trouble for you in the long run. Make sure you do. Also, let your members know you may decrease the amount of available credit if you reasonably believe that the consumer will be unable to fulfill the repayment obligations because of a material change in their financial circumstances. For a no-modification option, steer them to a traditional closed-end home equity loan through which they receive a lump-sum payout and repay the money over time with a structured payment schedule.

Richard Gallagher

To read more about how your members can understand the common misconceptions about home equity lending, go check out the CU Management article and then check out our home equity lending documents for your credit union.

(note: this is an older entry and has been edited since originally posted.)