Indian River County Extension Service
Judy Wakefield 770-5030
Avoid Home Equity Loan Fraud
If you are like most home owners, your house is the most important and valuable thing you own. The money you’ve put into your home can enable you to borrow money with a home equity loan. Your home secures the loan. This sounds good, but if an emergency happens and you are unable to make the loan payments, you can lose your home.
You may consider a home equity loan to make improvements or home repairs. To compare home equity loan rates visit the BankRate site (www.bankrate.com). This site contains calculators to help you figure out if you can afford a loan.
In most cases, it is legal for someone who lends you money secured by your home to seize your home if you do not make all the payments on time. Because of this, dishonest individuals have found ways to rip off home owners with high rate, high fee home loans that are impossible to repay. This is called home equity loan fraud.
Someone might arrive at your door without an invitation offering to do repairs and help you finance these repairs. They’ll talk you into taking out a home equity loan that you can’t afford to repay, and then legally obtain ownership of your home. Rule number 1 - never let yourself be rushed into signing for a loan secured by your home. Always insist on a few days to think about it.
The Federal Truth in Lending Act requires the lender to inform you of all the terms and costs of the loan when you receive an application, including the annual percentage rate (APR). Additional costs include "points" (each point equals one percent of the loan amount), appraisal fees (for inspecting te property), and closing costs and loan initiation fees (commission for the lender). All these fees can add up to payments that may be more than you can afford to pay.
Before taking out a home loan, ask these questions:
How much money am I borrowing? What is the total amount, including fees and interest, that I will need to pay off the loan?
What is the annual percentage rate of interest (APR).
Will I be paying a "fixed" interest rate, or will it change over time ("adjustable" rate)?
How does the quoted rate compare with those of other lenders?
What fees, points and closing costs will be added on to the loan?
Is there a "balloon" payment (a single very large payment at the end of the loan)?
How much are my monthly payments? For how many months?
Will I have enough to live on each month after making the loan payment: Can I really afford this loan?
Do I really need the repairs or home improvements?
Will I have to pay a prepayment penalty fee if I pay off the loan early or refinance with another lender?
Other tips include:
Do not let family members or friends talk you into taking out or cosigning a loan on your home for their own purposes. Look for other ways to help them out of financial difficulties, such as recommending debt counseling.
Shop around. Before you decide on a loan, meet with several different lenders, including large banks, small community institutions and credit unions.
Review the contract with someone you trust and have a lawyer review the document. Many local bar associations, senior organizations and local colleges have low-cost lawyer services, well worth the money when you are putting your home on the line.
Never sign any document that contains blank lines that could be filled in after you sign.
Make sure you understand everything in the contract. Find out all the costs of the loan, including the APR (annual percentage rate), fees, points and closing costs.
Be extra cautious about using a contractor recommended by a lender, and vice versa. When choosing a contractor, get personal references and check them, and contact the appropriate government licensing agency to verify that the contractor is licensed.
If you negotiated in a language other than English, with a loan broker or personal finance company, ask if a translation of the contract is available.
Federal law gives you three days after signing a home equity loan contract to cancel the deal, for any reason. This is called your "right of rescission." The three days, excluding Sunday, begin after all three of the following things have happened:
You sign the loan contract.
You receive disclosure of all the loan terms, as required by the Truth in Lending Act.
You receive two copies of a notice explaining your right of rescission.
To cancel a home equity loan contract, you must notify the lender in writing. Send your letter by certified mail by the third day with a return receipt requested. Also fax the letter or send a telegram to immediately notify the lender. Keep copies of your letter and all other paperwork. Within 20 days of rescinding, you must receive a full refund of all money you paid to the lender (with some exceptions).
A loan rate is considered a "high rate, high fee loan" if the interest rate is at least 10 percentage points higher than the rates on Treasury securities of the same maturity. For these loans Federal law requires you be given more information and special protections. You must be given a warning notice that you could lose your home and any equity you have built up in your home if you cannot pay off the loan, information about your right to cancel the loan within three days, and balloon payments and other penalties are banned.
Do not trust contractors who show up unasked and say that you need home repairs or other work done, especially if they recommend a lender to finance the work.
Be very careful if you are considering getting a home equity loan - for any purpose, even if it is to increase the value of your home in the long run. They are a very risky way to get money.