Putting Your Home on the Loan Line
Is Risky Business
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Are
you in need of cash?
Do
you want to consolidate your debts?
Are
you receiving home equity loan or refinancing
offers that seem too good to be true?
Does
your home need repairs that contractors tell you
can be easily financed? |
If you are a homeowner who needs money
to pay bills or for home repairs, you may think a home
equity loan is the answer. But not all loans and lenders
are the same--you should shop around. The cost of doing
business with high-cost lenders can be excessive and,
sometimes, downright abusive. For example, certain lenders--often
called "predatory lenders"--target homeowners
who have low incomes or credit problems or who are elderly
by deceiving them about loan terms or giving them loans
they cannot afford to repay.
Borrowing from an unscrupulous
lender, especially one who offers you a high-cost loan
using your home as security, is risky business.
You could lose your home and your money. Before you
sign on the line,
Think
about Your Options
If youre having money problems,
consider these options before you put your home on the
loan line.
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Talk with your creditors
or with representatives of non-profit or other reputable
credit or budget counseling organizations to work
out a plan that reduces your bill payments to a
more manageable level. |
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Contact your local
social service agency, community or religious groups,
and local or state housing agencies. They may have
programs that help consumers, including the elderly
and those with disabilities, with energy bills,
home repairs, or other emergency needs. |
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Contact a local
housing counseling agency to discuss your needs.
Call the U.S. Department of Housing and Urban Development
toll-free at 800-569-4287 or visit www.hud.gov/offices/hsg/sfh/hcc/hccprof14.cfm
to find a center near you. |
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Talk with someone
other than the lender or broker offering the loan
who is knowledgeable and you trust before making
any decisions. Remember, if you decide to get a
home equity loan and cant make the payments,
the lender could foreclose and you would lose your
home. |
If you decide a loan is right for
you, talk with several lenders, including at least
one bank, savings and loan, or credit union in your
community. Their loans may cost less than loans from
finance companies. And dont assume that if youre
on a fixed income or have credit problems, you wont
qualify for a loan from a bank, savings and loan, or
credit union--they may have the loan you want!
Do
Your Homework
Contact several lenders--and be very
careful about dealing with a lender who just appears
at your door, calls you, or sends you mail. Ask friends
and family for recommendations of lenders. Talk with
banks, savings and loans, credit unions, and other lenders.
If you choose to use a mortgage broker, remember they
arrange loans but most do not lend directly. Compare
their offers with those of other direct lenders.
Be wary of home repair contractors
that offer to arrange financing. You should still talk
with other lenders to make sure you get the best deal.
You may want to have the loan proceeds sent directly
to you, not the contractor.
Comparison shop. Comparing
loan plans can help you get a better deal. Whether you
begin your shopping by reading ads in your local newspapers,
searching on the Internet, or looking in the phone book,
ask lenders to explain the best loan plans they have
for you. Beware of loan terms and conditions that may
mean higher costs for you. Get answers to these questions
and use the worksheet
to compare loan plans:
Interest
Rate and Payments
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What are the monthly
payments? Ask yourself if you can afford them. |
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What is the annual
percentage rate (APR) on the loan? The APR is the
cost of credit, expressed as a yearly rate. You
can use the APR to compare one loan with another. |
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Will the interest
rate change during the life of the loan? If so,
when, how often, and by how much? |
Term of Loan
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How many years will
you have to repay the loan? |
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Is this a loan or
a line of credit? A loan is for a fixed amount of
money for a specific period of time; a line of credit
is an amount of money you can draw as you need it. |
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Is there a balloon
payment--a large single payment at the end of the
loan term after a series of low monthly payments?
When the balloon payment is due, you must pay the
entire amount. |
Points and Fees
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What will you have to pay in
points and fees? One point equals 1 percent of the
loan amount (1 point on a $10,000 loan is $100).
Generally, the higher the points, the lower the
interest rate. If points and fees are more than
5 percent of the loan amount, ask why. Traditional
financial institutions normally charge between 1
and 3 percent of the loan amount in points and fees. |
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Are any of the application fees
refundable if you dont get the loan? |
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How and how much will the the
lender or broker be paid? Lenders and brokers may
charge points or fees that you must pay at closing
or add on to the cost of your loan, or both. |
Penalties
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What is the penalty
for late or missed payments? |
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What is the penalty
if you pay off or refinance the loan early (that
is, is there a pre-payment penalty)? |
Credit Insurance
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Does the loan package include
optional credit insurance, such as credit life,
disability, or unemployment insurance? Depending
on the type of policy, credit insurance can cover
some or all of your payments if you can't make them.
Understand that you dont have to buy optional
credit insurance--thats why its called
optional. Dont buy insurance you
dont need. |
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Credit insurance may be a bad
deal for you, especially if the premiums are collected
up-front at the closing and financed as part of
the loan. If you want optional credit insurance,
ask if you can pay for it on a monthly basis after
the loan is approved and closed. With monthly insurance
premiums, you don't pay interest and you can decide
to cancel if the premiums are too high or if you
believe you no longer want the insurance. |
After you have answers to these
questions, start negotiating with more than one
lender. Dont be afraid to make lenders and brokers
compete for your business by letting them know you are
shopping for the best deal. Ask each lender to lower
the points, fees, or interest rate. And ask each to
meet--or beat--the terms of the other lenders.
Once Youve
Selected a Lender, Get the Following
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A Good Faith Estimate
of all loan charges. The estimate must be sent within
3 days of applying. |
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Blank copies of the forms youll
sign at closing, when the loan is final. Study them.
If you dont understand something, ask for
an explanation. |
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Advance copies of the forms youll
sign at closing with the terms filled in. A week
or two before closing, contact the lender to find
out if there have been any changes in the Good Faith
Estimate. By law, you can inspect the final settlement
statement (also called the HUD-1 or HUD-1A form)
one day prior to closing. Study these forms. Write
down any questions you want to ask. |
Think Twice
before You Sign
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Have a knowledgeable friend,
relative, attorney, or housing counselor review
the Good Faith Estimate and other loan papers before
you sign the loan contract. Be sure the terms are
the same ones you agreed to. For example, a lender
should not promise one APR and then--without good
reason--increase it at closing. |
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Refer to the list of questions
youve written down. Ask where these terms
are covered in the loan contract. And ask for an
explanation of any dollar amount or term you dont
understand. Dont let anyone rush you into
signing the loan contract. |
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Make sure all promises, oral
and otherwise, are put in writing. Its only
whats in writing that counts. |
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Get a copy of the documents
you signed before you leave the closing. |
Dont Sign on the Dotted Line if the Lender
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Tells you to falsify information
on the loan application (for example, suggests that
you write down more income than you really have). |
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Pressures you into applying for
a loan for more money than you need, or one that
has monthly payments larger than you can afford. |
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Promises one set of terms but
gives you another with no good reason for the change. |
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Tells you to sign blank forms
or forms that aren't completely filled in. If an
item is supposed to be blank, draw a line through
the space and initial it. |
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Pressures you to sign today.
A good deal today should be available tomorrow. |
Know
that You Have Rights under the Law
You Have
3 Business Days to Cancel the Loan
If you're using your home as security
for a home equity loan (or for a second mortgage loan
or a line of credit), federal law gives you 3 business
days after signing the loan papers to cancel the deal--for
any reason--without penalty. You must cancel in writing.
The lender must return any money you have paid to date.
Do You
Think You've Made a Mistake?
Has the 3-day period during which
you may cancel passed and you're worried that you've
gotten in over your head? Do you think your loan fees
were too high? Do you believe you were steered into
monthly payments you can't afford? Has your lender repeatedly
pressured you to refinance? Is your loan covered by
insurance you don't need or want?
If you think you've been taken advantage
of, state and federal laws may protect you. Also, the
following organizations may be able to help:
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Your local or state bar association--sometimes
listed under "Lawyers Referral Service"
in the Yellow Pages of your phone book. The association
may be able to refer you to low-cost or no-cost
lawyers who can help. |
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Your local consumer protection
agency, state attorney generals office, or
state office on aging, listed in the Blue Pages
of your phone book. |
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Your local fair housing group
or affordable housing agency, housing counseling
agency, or state housing agency. |
You can learn more about credit and
home equity loans by visiting the federal governments
web site for consumers, www.consumer.gov
(see the Home and Community section). If you dont
have access to the Internet, ask a friend or relative
to get the information for you. Or visit your local
library or senior center, which may offer you free access
to the Internet on their computers.
For More Information
State Banks that Are Members
of the Federal Reserve System
Division of Consumer and Community
Affairs
Mail Stop 801
Federal Reserve Board
Washington, DC 20551
(202) 452-3693
www.federalreserve.gov
Federally Insured State Non-Member
Banks and Savings Banks
Federal Deposit Insurance Corporation
Consumer Response Center
2345 Grand Boulevard, Suite 100
Kansas City, Missouri 64108
(877) 275-3342
www.fdic.gov
National Banks and National Bank-Owned
Mortgage Companies
Office of the Comptroller of
the Currency
Customer Assistance Group
1301 McKinney Street
Suite 3450
Houston, TX 77010
(800) 613-6743
www.occ.treas.gov
Federally Insured Savings and Loan
Institutions and Federally Chartered Savings Banks
Office of Thrift Supervision
Consumer Programs
1700 G Street, N.W., 6th Floor
Washington, DC 20552
(800) 842-6929
www.ots.treas.gov
Federal Credit Unions
National Credit Union Administration
Office of Public and Congressional Affairs
1775 Duke Street
Alexandria, VA 22314
(703) 518-6330
www.ncua.gov
For state-chartered credit unions,
contact your state's regulatory agency.
Mortgage Companies and Other Lenders
Federal Trade Commission
Consumer Response Center
600 Pennsylvania Avenue, N.W.
Washington, DC 20580
(877) FTC-HELP (877-382-4357,
toll free)
www.ftc.gov
Other Information Sources
U.S. Department of Justice
Civil Rights Division
950 Pennsylvania Ave., N.W.
Housing and Civil Enforcement Section, NWB
Washington, DC 20580
(202) 514-4713
www.usdoj.gov/crt/housing/hcehome.html
Federal Housing Finance Board
1777 F Street, N.W.
Washington, DC 20006
(202) 408-2500
www.fhfb.gov
Department of Housing and Urban
Development
451 7th Street, S.W.
Washington, DC 20410
800-669-9777 (voice)
800-927-9275 (TTY)
www.hud.gov
Office of Federal Housing Enterprise
Oversight (OFHEO)
1700 G Street, N.W.
4th Floor
Washington, DC 20552
(202) 414-6922
www.ofheo.gov
This information was prepared by the
following federal agencies: Department of Housing and
Urban Development, Department of Justice, Federal Deposit
Insurance Corporation, Federal Housing Finance Board,
Federal Reserve Board, Federal Trade Commission, National
Credit Union Administration, Office of Federal Housing
Enterprise Oversight, Office of the Comptroller of the
Currency, Office of Thrift Supervision.
Comparison
Shopping for a Home Equity Loan
Use this worksheet to help you shop
for the best deal.
Compare
answers to these questions |
Lender A |
Lender B
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Lender C |
My
Current Mortgage |
What are the monthly payments? |
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What is the Annual Percentage Rate (APR)?
the cost of credit expressed as a yearly
rate; includes the interest rate, points, broker
fees, and other credit charges
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What is the interest rate?
the cost of borrowing money expressed as
a percentage rate
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Will the interest rate change? |
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When?
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How often?
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By how much?
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What will you have to pay in points? |
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What will you have to pay in fees? |
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Application or loan processing fee
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Origination or underwriting fee
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Lender or funding fee
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Appraisal fee
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Document preparation and recording fees
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Broker fees
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Other fees
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Are any of the application fees refundable if
you dont get the loan? |
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How many years will you have to repay the loan? |
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Is this an installment loan or a line of credit? |
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Is there a balloon payment? |
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What are the total closing costs? |
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If you use a broker, how and how much will he
or she be paid? |
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What is the penalty for late or missed payments? |
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What is the penalty if you pay off or refinance
the loan early? |
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Does the loan include optional credit insurance?
You dont have to accept optional
credit insurance to get your loan. If you want
optional credit insurance, ask about paying
for it monthly instead of financing the premiums
as part of your loan.
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Can you afford this loan? |
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