Home Equity Scams - 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 arrangqualified marine surveyor. I stress qualified because at this time anyone can call themselves a marine surveyor. Ask at the local marina for a recommendation and make sure that they are a member of either, or both, of the marine surveyor associations. You can call the National Association of Marine Surveyors - NAMS or the Society of Accredited Marine Surveyors - SAMS and they can recommend a surveyor in your area.

Become A Boat Detective

Whether you employ a surveyor or not, you should know some of the things to look for if you have decided to buy a used boat. A keen eye, a good ear and a checklist will lead you to potential problems. Some of the things to look for are:

• Mismatched paint. This could indicate that the boat has been in an accident and had repairs made. Although this in and of itself may not disqualify the boat, if you were not told of the repairs what else might you not have been told about?
• Does the keel run true in a straight line fore and aft? Is is straight horizontally?
• Do you see any apparent water lines inside the boat or on the engine. Look for a line that separates a rust free area on the engine and an lower area with a lot of rust. This could indicate that the boat took on water.
• On an inboard, does the shaft turn true or does it wobble? What about the prop - any nicks or cracks?
• Take hold of the prop and try to move it up and down and sideways. You should not be able to move it much. If you can, you have a worn cutlass bearing.
• Take a small rubber or phenol hammer and lightly tap the hull moving around the boat. If you hear voids in the fiberglass, that could be a problem of repairs, blisters, or delamination.
• Walk around the decks and on the bow - you shouldn't find soft spots.
• How are the floors inside? Any soft spots?
• Is the steering free and easy to move?
• Is the upholstery in good shape?
• Check around hatches and windows - do you see water stains inside? If so, these will havehe 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.

  Protecting Yourself

  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.

  Courtesy of the FTC

  
  
  
  
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