Home Equity Loan Scams

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. Certain abusive or exploitative lenders target homeowners-particularly elderly, minority and those with low incomes or poor credit- who unwittingly may be putting their home on the line.

Here are some predatory equity loan scams the Federal Trade Commission wants you to look out for:

Equity Stripping

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.

As soon as you fall behind on the monthly payments, the lender can foreclose-taking your home and stripping you of the equity you have spent years building.

Hidden Loan Terms: The Balloon Payment

A 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" - 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 your mortgage 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. 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. He tells you 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 contractor threatens to leave the work on your house unfinished if you don't sign. 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 isn't completed.

Credit Insurance Packing

At your mortgage closing, the lender gives you papers to sign that include charges for credit insurance or other "benefits" that you didn't ask for and don't want. If you object, the lender may 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're really 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), and unexplained late fees, costly property insurance and legal fees. The lender doesn't provide you with an accurate or complete account of these charges. 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

You're having trouble paying your mortgage and the lender has threatened to foreclose and take your home. Another "lender" contacts 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. But the "lender" may borrow against your home 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.

Dos and Don'ts

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.

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