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Equity Loans: Borrowers Beware! |
courtesy FTC
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.
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.
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.
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