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.
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.
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 consumer issues, visit
www.ftc.gov or
call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. The
FTC enters Internet, telemarketing, identity theft and other fraud-related
complaints into
Consumer Sentinel, a
secure, online database available to hundreds of civil and criminal law
enforcement agencies in the U.S. and abroad.
|
FEDERAL TRADE COMMISSION |
FOR THE CONSUMER |
1-877-FTC-HELP |
www.ftc.gov |
|
April 1998 |