Refinancing a mortgage at a lower interest rate or taking out a home equity loan may make sense for some homeowners. What doesn’t make sense is losing your home because you fall for home equity loans and refinancing scams. Although scammers can be convincing, owners who know what to look for are less likely to become victims. Whenever you borrow money, get two or more quotes to compare from different lenders. Below are some commonly used scams.
Loan reversal is a scam aimed at homeowners looking to recover money when they refinance a mortgage. This is often called a cash-out refi.
A cashout refi by itself is not a scam. For some, it’s a smart way to borrow. What is a scam is when a lender, after receiving a few payments, comes back to you with an offer of another refinance. Easy money is hard to turn down for some homeowners.
Many borrowers don’t realize how much they are paying in refinance fees. The US Federal Reserve estimates settlement costs for a typical refi at 3% to 6% of the loan amount. However, borrowers often charge significantly more, and they may quietly build settlement fees into the loan to hide the total charges.
The loan rollover ultimately leaves you with more debt and more years than you will owe on that debt. When equity finally dries up, you may not be able to afford your higher monthly payments and another refinance will be impossible. As a result, you may be forced to sell your home.
Stripping can happen in many ways, but at its heart is a crook who acquires ownership of your home, borrows against it or sells it, pockets the proceeds and disappears. As a result, you often find yourself with a large mortgage balance and no place to live.
A telltale sign of capital stripping is a lender offering more loans than you can afford or encouraging you to increase your income on a loan application. Homeowners with low incomes but good home equity are prime targets because they typically have difficulty borrowing money. According to the U.S. Federal Trade Commission, a lender offering a home loan with too high monthly payments is likely relying on foreclosure on the property when you fall behind.
In a variation of stripping, a scammer tricks you into selling your home at a discount or signing the deed, perhaps with the promise of better loan terms if your name is not on it . The scammer promises to let you stay in the house as a tenant until the refinance is finalized; then you can buy the house. In reality, the scammer is draining equity by borrowing against the house or selling the house, perhaps after evicting you.
According to Consumers Union, don’t take a home equity loan if you can’t afford it. A good rule of thumb: your combined home loan repayments should not exceed 28% of your gross income. The nonprofit publisher of Consumer Reports magazine also cautions against signing documents unless you understand them and handing over your property to anyone without first consulting a trusted adviser.
Beware of unsolicited refinance offers from companies claiming government affiliations. In particular, don’t be fooled by the use of official-sounding acronyms like “TARP” or official-looking websites. Scammers use them to gain your trust. Once they do, they will likely try to charge you to access government assistance. Worse still, they could extract enough personal information to commit identity theft.
You never need to pay to learn about legitimate government programs. A housing counselor licensed by the US Department of Housing and Urban Development can point you in the right direction. For help with federal refinancing and loan modification, check out the Making Home Affordable program.
New disclosure rules make it easier to spot scams.
Many unscrupulous lenders have relied on confusing documents to trick borrowers into paying excessive upfront fees on loans. Others would pull out last-minute rate changes at the close. Yet others would hide prepayment penalties, which can prove costly if you try to refinance again or withdraw a loan early.
Lump-sum payments, which fall due at the end of a loan’s term, can also catch borrowers off guard. For example, a lender may offer a low monthly payment on an equity loan, but only because the payment is interest only. The principal is due in one payment. Surprised owners must scramble to refinance again, operate other assets, or sell.
Disclosure rules that went into effect January 1, 2010 require all lenders to use Good Faith Estimate (GFE) and HUD-1 Settlement Statement forms that clearly disclose key loan terms – including interest rates, prepayment penalties, lump sum payments and closing costs. .
The GFE is an estimate of loan terms and closing costs, while the HUD-1 is a final tally of terms and costs. The redesigned forms, referenced by line number, should be used for mortgage refinance and home equity loans (excluding home equity lines of credit or HELOCs). The only fee a lender is allowed to charge for issuing a GFE is for a credit report, which averages $37.
If you do not receive the new forms, do not do business with the lender. If the estimates on the GFE don’t match the final numbers on the HUD-1, ask why. Some, but not all, fees may increase within a fixed range. It also helps to compare quotes from different lenders and do your research beforehand. Your home is one of your most valuable assets, so protect it by being informed.
Marlin Palich is President of Stark Trumbull Area Realtors, which serves Stark, Carroll and Trumbull counties. Visit www.star.realtor for a complete listing of Realtors and Affiliate Members. If you have questions or comments about this article, contact Cosgrove at [email protected]