Need
a Loan? Think Twice About Using Your Home as Collateral
If you need money to pay bills or
make home improvements, and think the answer is in refinancing,
a second mortgage, or a home equity loan, consider your
options carefully. If you can't make the required payments,
you could lose your home as well as the equity you've
built up. That's why it's important not to let anyone
talk you into using your home to borrow money you may
not be able to afford to pay back. Not all loans or
lenders are created equal. Some unscrupulous lenders
target older or low-income homeowners and those with
credit problems. These lenders may offer loans based
on the equity in your home, not on your ability to repay
the loan. High interest rates and credit costs can make
it very expensive to borrow money, even if you use your
home as collateral.
Talk to an attorney, financial advisor,
or someone else you trust before you make any decisions
about borrowing money. Non-profit credit and housing
counseling services also can be useful in helping you
manage your credit and make smart decisions about loans.
Early Warning
Signs
Avoid any lender who:
- tells you to falsify information on the loan
application. For example, stay away from a lender
who tells you to say that your income is higher
than it is.
- pressures you into applying for a loan or
applying for more money than you need.
- pressures you into accepting monthly payments
you can't make or could have trouble making.
- fails to provide required loan disclosures
or tells you not to read them.
- misrepresents the kind of credit you're getting,
like calling a one-time loan a line of credit.
- promises one set of terms when you apply,
and gives you another set of terms to sign —
with no legitimate explanation for the change.
- tells you to sign blank forms — and
says they'll fill in the blanks later.
- says you can't have copies of the documents
that you've signed.
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You can take some steps to protect
your home and the equity you've built up in it. Here's
how.
1. Shop Around. Costs can vary
greatly.
Contact several lenders — including
banks, savings and loans, credit unions, and mortgage
companies. Ask each lender about the best loan you would
qualify for. Compare:
- The annual percentage rate
(APR). The APR is the single most important
thing to compare when you shop for a loan. It takes
into account not only the interest rate, but also
points (one point equals one percent of the loan amount),
mortgage broker fees, and certain other credit charges
the lender requires the borrower to pay, expressed
as a yearly rate. Generally, the lower the APR, the
lower the cost of your loan. Ask if the APR is fixed
or adjustable — that is, will it change? If
so, how often and how much?
- Points and fees.
Ask about points and other fees that you'll be charged.
These charges may not be refundable if you refinance
or pay off the loan early. And if you refinance, you
may pay more points. Points usually are paid in cash
at closing, but may be financed. If you finance the
points, you'll have to pay additional interest, increasing
the total cost of your loan.
- The term of the loan.
How many years will you make payments on the loan?
If you're getting a home equity loan that consolidates
credit card debt and other shorter-term loans, remember
that the new loan may require you to make payments
for a longer time.
- The monthly payment.
What's the amount? Will it stay the same or change?
Find out if your monthly payment will include escrows
for taxes and insurance.
- Balloon payments.
This is a large payment usually at the end of the
loan term, often after a series of lower monthly payments.
When the balloon payment is due, you must come up
with the money. If you can't, you may need another
loan, which means new closing costs, as well as points
and fees.
- Prepayment penalties.
Prepayment penalties are extra fees that may be due
if you pay off the loan early by refinancing or selling
your home. These fees may force you to keep a high-rate
loan by making it too expensive to get out of the
loan. If your loan includes a prepayment penalty,
understand the penalty you would have to pay. Ask
the lender if you can get a loan without a prepayment
penalty, and what that loan would cost. Then decide
what's right for you.
- Whether the interest rate
for the loan will increase if you default. An
increased interest rate provision says that if you
miss a payment or pay late, you may have to pay a
higher interest rate for the rest of the loan term.
Try to negotiate this provision out of your loan agreement.
- Whether the loan includes
charge for any type of voluntary credit insurance,
like credit life, disability, or unemployment insurance.
Will the insurance premiums be financed as part of
the loan? If so, you'll pay additional interest and
points, further increasing the total cost of the loan.
How much lower would your monthly loan payment be
without the credit insurance? Will the insurance cover
the length of your loan and the full loan amount?
Before you decide to buy voluntary credit insurance
from a lender, think about whether you really need
the insurance and check with other insurance providers
about their rates.
You'll also want to ask each lender
to provide, as soon as possible, a written Good Faith
Estimate that lists all charges and fees you must pay
at closing. Ask for a Truth in Lending Disclosure, too.
It states the monthly payment, the APR and other loan
terms. Although lenders are not always required to provide
these estimates, they're very helpful because they make
it easier to compare terms from different lenders.
2. After Choosing a Lender
- Negotiate. It
never hurts to ask if the lender will lower the APR,
take out a charge you don't want to pay, or remove
a loan term that you don't like.
- Ask the lender for a blank
copy of the form(s) you will sign at closing.
While they don't have to give you blank forms, most
legitimate lenders will. Take the forms home and review
them with someone you trust. Ask the lender about
items you don't understand.
- Ask the lender to give
you copies of the actual documents that you'll
be asked to sign as soon as possible. While a lender
may not be required to give you all of the actual
filled-in documents before closing, it doesn't hurt
to ask.
- Be sure you can afford
the loan. Figure out whether your monthly
income is enough to cover each monthly payment, in
addition to your other monthly bills and expenses.
If it isn't, you could lose your home — and
your equity — through foreclosure or a forced
sale.
- If you are refinancing
a first mortgage, ask about escrow services.
Ask if the loan's monthly payment includes an escrow
amount for property taxes and homeowner's insurance.
If not, be sure to budget for those amounts, too.
3. At Closing
Before you sign anything,
ask for an explanation of any dollar amount, term or
condition that you don't understand.
Ask if any of the loan terms
you were promised before closing have changed.
Don't sign a loan agreement if the terms differ from
what you understood them to be. For example, a lender
should not promise a specific APR and then — without
good reason — increase it at closing. If the terms
are different, negotiate for what you were promised.
If you can't get it, be prepared to walk away and take
your business elsewhere.
Before leaving the lender,
make sure you get a copy of the documents you signed.
They contain important information about your rights
and obligations.
Don't initial or sign anything
saying you're buying voluntary credit insurance unless
you really want to buy it.
4. After Closing
Having second thoughts about the loan?
The Truth in Lending Act gives most
home equity borrowers at least three business days after
closing to cancel the deal. This is known as your right
of "rescission." In some situations (ask your
attorney), you may have up to three years to cancel.
To rescind, you must notify the creditor in writing.
Make sure you document your rescission. Send your letter
by certified mail, and request a return receipt. That
will allow you to document what the creditor received
and when. Keep copies of your correspondence and any
enclosures. After you rescind, the lender has 20 days
to return the money or property you paid to anyone as
part of the credit transaction and release any security
interest in your home. Remember that you must then offer
to return the creditor's money or property, which may
mean getting a new loan from another lender.
High-Rate,
High-Fee Loans
The Home Ownership and Equity
Protection Act (HOEPA) may give you additional
rights if your loan is a home equity loan, second
mortgage or refinance secured by your principal
residence and if:
- the loan's APR exceeds by more than 8 percent
the rate on a Treasury note of comparable maturity
on a first mortgage, or the loan's APR exceeds
by more than 10 percent the rate on a Treasury
note of comparable maturity on a second mortgage.
- the total fees and points at or before closing
exceed $499 or 8 percent of the total loan amount,
whichever is larger. (The $499 figure is for
2004 and is adjusted annually.) Credit insurance
premiums written in connection with the loan
count as fees for this purpose.
If HOEPA applies:
- A lender may not engage in a pattern or practice
of lending based on home equity without regard
to the borrower's ability to repay the loan.
- You must get certain disclosures from the
lender at least three business days before closing.
- Your lender cannot make a direct payment to
a home improvement contractor.
- Certain loan terms are illegal — such
as most prepayment penalties and increased interest
rates at default.
- In most situations, your loan cannot have
a balloon payment due in less than five years.
- Due-on-demand clauses may not be used unless
the consumer defaults.
- A lender that has made a HOEPA loan to a borrower
generally may not refinance that loan into another
HOEPA loan within the first year.
- Your lender may not call a one-time loan a
line of credit.
A high-rate or high-fee
loan might be right for you, but be aware that
it has risks. It is an extremely expensive way
to borrow money. You could lose your home if you
can't make the payments. |
Where to
Complain
If you think your lender has violated the law, you may
wish to contact the lender or loan servicer to register
your concerns. At the same time, you may want to contact
an attorney, your state Attorney General's office or
banking regulatory agency, or the Federal Trade Commission.
For More
Information
The American Association of Retired Persons has information
about predatory lending. You can access information
by phone: toll-free 1-800-424-3410; by mail: AARP, 601
E Street, NW, Washington, DC 20049; or on the Web:
www.aarp.org/consumerprotect-homeloans.
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