a Loan? Think Twice About
Your Home as Collateral
need money to pay bills or make home improvements, and think refinancing,
a second mortgage, or a home equity loan is the answer - 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.
Don't let anyone talk you into using your home to borrow money you
don't really need.
loans or lenders are created equal. Some unscrupulous lenders target
elderly and 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 borrowing money using your home very expensive.
with your attorney, financial advisor, or someone else you trust
before making any loan decisions. Non-profit credit and housing
counseling services can also be useful in helping you manage your
credit and make decisions about loans.
any lender who:
you, or requires you, to falsify information on the loan application.
For example, the lender tells you to say that your loan is primarily
for business purposes when it's not.
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.
fails to provide required loan disclosures or tells you not to read
misrepresents the kind of credit you're getting. For example, 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 - the lender says they'll fill them
says you can't have copies of documents that you've signed.
take some steps to protect your home and your equity. Here's how.
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
for which you qualify. Compare:
percentage rate (APR). The APR is the single most important thing
to compare when shopping 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
the APR change?
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 are usually paid in cash at closing, but may be financed.
If you finance the points, you'll pay additional interest and increase
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 obligate you for a longer period.
The monthly payment. What's the amount? Will it stay the same or
Is there a balloon payment? This is a large payment usually at the
end of the loan term, often after a series of low 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, and points and fees.
Is there a prepayment penalty? These are extra fees that may be
due if you pay off the loan early by refinancing or selling your
home. Prepayment penalties may force you to keep a high-rate loan
by making getting out of the loan too expensive. Try to negotiate
this penalty out of your loan agreement.
Will the interest rate for the loan 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 as well.
Does the loan include a charge for any type of voluntary credit
insurance, such as 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 and further increase
the total cost of the loan. How much lower would your monthly payment
on your loan be without the credit insurance? Will the insurance
cover the length of your loan and the full loan amount? Before deciding
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.
Lastly, 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. Although not always required, these estimates
make it easier to compare terms from different lenders.
Choosing a Lender
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
Ask the lender for a blank copy of the form(s) you'll 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 have
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 homeowners insurance. If not, be sure to budget
for those amounts too.
3. At Closing
you sign anything, ask for an explanation of any dollar amount,
term, or condition that you don't understand.
Don't sign a loan agreement if the terms differ from what you thought
they would 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, be prepared to walk away and shop elsewhere.
Make sure you get a copy of the documents you signed before leaving
the lender. They contain important information about your rights
Don't initial or sign anything saying you're buying voluntary credit
insurance unless you really want to buy that insurance.
4. After Closing
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 (consult with your attorney), you may have as
much as three years to cancel. To rescind, you must notify the creditor
in writing. After you rescind, the lender has 20 days to return
all money or property you paid to anyone as part of the credit transaction
and release any security interest in your home. You must then offer
to return the creditor's money or property, which may mean getting
a new loan from another lender.
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:
APR exceeds by more than 10% the rate on a Treasury note of comparable
the total fees and points at or before closing exceed the larger
of $451 or 8% of the total loan amount. (The $451 figure is for
2000 and is adjusted annually.)
If HOEPA applies:
may not engage in a pattern or practice of lending based on home
equity without regard to the borrowers ability to repay the
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.
A high-rate or high-fee loan might be right for you, but be aware
of the risks. These loans are extremely expensive ways to get money.
You could lose your home if you cant make the payments.
think your lender has violated the law or you want information about
a right to rescind, contact a private attorney, your state's Attorney
General's office or banking regulatory agency, or the Federal Trade
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