Borrow wisely to reduce risk of losing your home

By Sandra Block
USA Today

How to reduce the risk of foreclosure on your home:

• Borrow only what you can afford. Lenders approve mortgages based on gross income and outstanding debt, says Karen Hiller, executive director at Housing and Credit Counseling in Topeka, Kan. But they don't factor in ongoing expenses, such as tuition or treatment of a chronic illness. Draw up a budget and figure out what you can afford monthly before talking to lenders, Hiller says.

• Be careful with ARMs. Interest rates on adjustable-rate mortgages are at all-time lows, making them great deals for short-term homeowners. But if you don't move or refinance before the rate adjusts, you could find yourself with a monthly payment you can no longer afford.

• Tap equity sparingly. Don't borrow against your home unless you're confident you can repay the loan. Low mortgage rates have prompted millions of homeowners to tap their homes for cash, either through home-equity loans or cash-out refinancing. Borrowing against your home can be a smart strategy if you're using the money for a special project, such as home improvement. But if you're financially strapped, it could cost you your home. Hiller says she has dealt with clients whose home-equity loan payments were as large as their regular mortgage payments. "If they miss one payment or the other, the house is in jeopardy," she says. "They've doubled their risk."

• Avoid predatory lenders. These companies prey on low-income and elderly homeowners with poor credit. They persuade cash-strapped homeowners to take out high-cost loans using their homes as collateral. When the borrowers fall behind, the lenders foreclose. Some housing counselors believe predatory lending contributed to the rise in the national foreclosure rate.

If an unfamiliar lender approaches you, check out the company before signing anything. Contact your state government's consumer protection office or the local Better Business Bureau. Be particularly wary of unsolicited offers from home improvement contractors or loan brokers. Predatory lenders sometimes review publicly available property liens in an effort to target homeowners with debt problems.

You can find more information about predatory lenders in the summer issue of the Federal Deposit Insurance Corp.'s "Consumer News" publication. It's available at the FDIC Web site, www.fdic.gov.