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Home Equity Loans - Borrowers Beware
Do you own your home? If so, it's likely to be your greatest
single asset. Unfortunately, if you agree to a loan that's based
on the equity you have in your home, you may be putting your
most valuable asset at risk.
Homeowners - particularly elderly, minority, and those with low
incomes or poor credit - should be careful when borrowing money
based on their home equity. Why? Certain abusive or exploitative
lenders target these borrowers, who unwittingly may be putting
their home on the line.
Abusive lending practices range from equity stripping and loan
flipping to hiding loan terms and packing a loan with extra
charges. The Federal Trade Commission urges you to be aware of
these loan practices to avoid losing your home.
The Practices
Equity Stripping
You need money. You don't have much income coming in each month.
You have built up equity in your home. A lender tells you that
you could get a loan, even though you know your income is just
not enough to keep up with the monthly payments. The lender
encourages you to "pad" your income on your application form to
help get the loan approved.
This lender may be out to steal the equity you have built up in
your home. The lender doesn't care if you can't keep up with the
monthly payments. As soon as you don't, the lender will
foreclose-taking your home and stripping you of the equity you
have spent years building. If you take out a loan but don't have
enough income to make the monthly payments, you are being set
up. You probably will lose your home.
Hidden Loan Terms: The Balloon Payment
You've fallen behind in your mortgage payments and may face
foreclosure. Another lender offers to save you from foreclosure
by refinancing your mortgage and lowering your monthly payments.
Look carefully at the loan terms. The payments may be lower
because the lender is offering a loan on which you repay only
the interest each month. At the end of the loan term, the
principal-that is, the entire amount that you borrowed-is due in
one lump sum called a balloon payment. If you can't make the
balloon payment or refinance, you face foreclosure and the loss
of your home.
Loan Flipping
Suppose you've had your mortgage for years. The interest rate is
low and the monthly payments fit nicely into your budget, but
you could use some extra money. A lender calls to talk about
refinancing, and using the availability of extra cash as bait,
claims it's time the equity in your home started "working" for
you. You agree to refinance your loan. After you've made a few
payments on the loan, the lender calls to offer you a bigger
loan for, say, a vacation. If you accept the offer, the lender
refinances your original loan and then lends you additional
money. In this practice-often called "flipping"-the lender
charges you high points and fees each time you refinance, and
may increase your interest rate as well. If the loan has a
prepayment penalty, you will have to pay that penalty each time
you take out a new loan.
You now have some extra money and a lot more debt, stretched out
over a longer time. The extra cash you receive may be less than
the additional costs and fees you were charged for the
refinancing. And what's worse, you are now paying interest on
those extra fees charged in each refinancing. Long story short?
With each refinancing, you've increased your debt and probably
are paying a very high price for some extra cash. After a while,
if you get in over your head and can't pay, you could lose your
home.
The "Home Improvement" Loan
A contractor calls or knocks on your door and offers to install
a new roof or remodel your kitchen at a price that sounds
reasonable. You tell him you're interested, but can't afford it.
He tells you it's no problem-he can arrange financing through a
lender he knows. You agree to the project, and the contractor
begins work. At some point after the contractor begins, you are
asked to sign a lot of papers. The papers may be blank or the
lender may rush you to sign before you have time to read what
you've been given. The contractor threatens to leave the work on
your house unfinished if you don't sign. You sign the papers.
Only later, you realize that the papers you signed are a home
equity loan. The interest rate, points and fees seem very high.
To make matters worse, the work on your home isn't done right or
hasn't been completed, and the contractor, who may have been
paid by the lender, has little interest in completing the work
to your satisfaction.
Credit Insurance Packing
You've just agreed to a mortgage on terms you think you can
afford. At closing, the lender gives you papers to sign that
include charges for credit insurance or other "benefits" that
you did not ask for and do not want. The lender hopes you don't
notice this, and that you just sign the loan papers where you
are asked to sign. The lender doesn't explain exactly how much
extra money this will cost you each month on your loan. If you
do notice, you're afraid that if you ask questions or object,
you might not get the loan.
The lender may tell you that this insurance
comes with the loan,
making you think that it comes at no additional cost. Or, if you
object, the lender may even tell you that if you want the loan
without the insurance, the loan papers will have to be
rewritten, that it could take several days, and that the manager
may reconsider the loan altogether. If you agree to buy the
insurance, you really are paying extra for the loan by buying a
product you may not want or need.
Mortgage Servicing Abuses
After you get a mortgage, you receive a letter from your lender
saying that your monthly payments will be higher than you
expected. The lender says that your payments include escrow for
taxes and insurance even though you arranged to pay those items
yourself with the lender's okay. Later, a message from the
lender says you are being charged late fees. But you know your
payments were on time. Or, you may receive a message saying that
you failed to maintain required property insurance and the
lender is buying more costly insurance at your expense.
Other charges that you don't understand - like legal fees - are
added to the amount you owe, increasing your monthly payments or
the amount you owe at the end of the loan term. The lender
doesn't provide you with an accurate or complete account of
these charges. You ask for a payoff statement to refinance with
another lender and receive a statement that's inaccurate or
incomplete. The lender's actions make it almost impossible to
determine how much you've paid or how much you owe. You may pay
more than you owe.
Signing Over Your Deed
If you are having trouble paying your mortgage and the lender
has threatened to foreclose and take your home, you may feel
desperate. Another "lender" may contact you with an offer to
help you find new financing. Before he can help you, he asks you
to deed your property to him, claiming that it's a temporary
measure to prevent foreclosure. The promised refinancing that
would let you save your home never comes through.
Once the lender has the deed to your property, he starts to
treat it as his own. He may borrow against it (for his benefit,
not yours) or even sell it to someone else. Because you don't
own the home any more, you won't get any money when the property
is sold. The lender will treat you as a tenant and your mortgage
payments as rent. If your "rent" payments are late, you can be
evicted from your home.
Protecting Yourself
You can protect yourself against losing your home to
inappropriate lending practices. Here's how:
Don't:
- Agree to a home equity loan if you don't have enough income to
make the monthly payments.
- Sign any document you haven't read or any document that has
blank spaces to be filled in after you sign.
- Let anyone pressure you into signing any document.
- Agree to a loan that includes credit insurance or extra
products you don't want.
- Let the promise of extra cash or lower monthly payments get in
the way of your good judgment about whether the cost you will
pay for the loan is really worth it.
-Deed your property to anyone. First consult an attorney, a
knowledgeable family member, or someone else you trust.
Do:
- Ask specifically if credit insurance is required as a
condition of the loan. If it isn't, and a charge is included in
your loan and you don't want the insurance, ask that the charge
be removed from the loan documents. If you want the added
security of credit insurance, shop around for the best rates.
- Keep careful records of what you've paid, including billing
statements and canceled checks. Challenge any charge you think
is inaccurate.
- Check contractors' references when it is time to have work
done in your home. Get more than one estimate.
- Read all items carefully. If you need an explanation of any
terms or conditions, talk to someone you can trust, such as a
knowledgeable family member or an attorney. Consider all the
costs of financing before you agree to a loan.
For More Information:
The FTC works for the consumer to prevent fraudulent, deceptive
and unfair business practices in the marketplace and to provide
information to help consumers spot, stop and avoid them. To file
a complaint, or to get free information on any of 150 consumer
topics, call toll-free, 1-877-FTC-HELP (1-877-382-4357), or use
the complaint form at www.ftc.gov. The FTC enters Internet,
telemarketing, and other fraud-related complaints into Consumer
Sentinel, a secure, online database available to hundreds of
civil and criminal law enforcement agencies worldwide.
Federal Trade Commission
Bureau of Consumer Protection
Office of Consumer and Business Education
This article is public domain.
About the author:
Visit Home Equity
Credit Line for more public domain articles from the
Federal Trade Commission, Federal Reserve Board, and other
resources that will help you decide if using your home equity is
right for you, and avoid mistakes and scams that could cost you
your home.
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