Scams: 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.
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
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.
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"
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.
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.
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
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
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:
- 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
- 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.
- 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
- 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.