Need a Loan? Think Twice About Using Your Home as Collateral
2nd Mortgage Refi Information from The United States Federal Trade Commission
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.
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.
- 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 FTC publishes a series of free publications on credit and
financial issues, including Fiscal Fitness: Choosing a Credit
Counselor and Knee Deep in Debt. They are available at
ftc.gov/credit, or by calling toll-free: 1-877-FTC-HELP.
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 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.
Source: The United States Federal Trade Commission, January 2004
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