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Building Equity vs. Liquidity, Why Is It Likely To Lead To Foreclosure?

Building Equity vs. Liquidity, Why Is It Likely To Lead To Foreclosure?

Owning a rental property is the goal of many Americans, maybe due to the associated benefits and the assurance of steady flow of income. In most cases, people take out mortgages and loans to pay for their properties. Lenders often allow for a standard fixed rate spread throughout a 15-30 year period. Most mortgages are amortized meaning that you pay for the interests as well as the principal amount. 

Some property owners try their best to write off their mortgage payments by paying in extra money in each monthly installment. While this may help them in clearing their debts fast, it may also subject them to financial problems and worse still, to a foreclosure. Some people have held on building equity than cashing out their properties when they are faced with financial standoff, which presents a risk of foreclosure.

Risks of taking out a home equity or refinancing loan:

Most property owners take out additional loans, to close the initial mortgage. It is not a bad idea either, since the money they get from building equity can be channeled to other uses. There are pitfalls involved, which every property owner should know. They include:

1. You might face a pre-payment penalty

If you decide to pay your loan in bulk; you may be fined depending on the provisions of your loan agreement. Hence, before you proceed to make large payments, ensure there are no attached penalties.

2. You can be lured into taking hefty second home loans at high interest rates

The lenders understand that you are in the edge of desperation to secure another loan. Hence, they will do all the tricks to get you into the trap. For instance, some offer a large amount of money, even when you do not qualify for a loan. Afterwards, they charge you high interest rates. Such loans, can put you into a serious financial standoff and in some cases, they can lead to a foreclosure.

3. The borrower can be tempted to use the money for other unrelated uses

Most property owners do not give much thought about the main reasons they want to take out a home equity loan. To them, they see the loan accrued from their equity as a benefit from their investment. Such misconception has placed many investors in a compromising situation financially. Since, the equity loans offer much money; people tend to use the money leisurely. With time, they are unable to pay even the little they used to pay for the loan earlier. In the end, the bank comes in and forecloses the property.

How to escape narrowly from a foreclosure

The future is unpredictable; while you might think, you will be able to clear the mortgage as soon as possible, something could crop up.  You should know that the bank is only on your side when you make payments as scheduled, otherwise they will not mind to foreclose your property. Even if using liquidity is risky, it is the most feasible way out of the financial mess you are in, as you wait for your financial situation to get better. By liquidating the loan, you will ensure that you maintain a good relationship with your creditor and your property is not foreclosed.

Building equity is good as it allows you to get a refinancing, but it can also get you into trouble. Some people do not know when to let go, so when things turn bad, they default in mortgage payments and eventually become victims of a foreclosure. Undertaking liquidity is the best solution to prevent such unfortunate incident.

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