Tech Tips and Tid Bits...
Tech Tips and Tid Bits...
At a time when stock prices have tumbled,
so have interest rates on home equity loans and mortgages, and many homeowners
are borrowing against their homes to generate cash. More specifically, many
truckers are refinancing their homes to get cash to buy new tractors, trailers
and/or equipment. As a result of this equity-draining frenzy, many people are
putting themselves at risk of being victimized by “predatory” lenders. A predatory
loan occurs when a company misleads, tricks, or even coerces someone into taking
out a home loan with excessive costs and without regard to the homeowner’s ability
to repay. The consequences of such a loan can be severe since the defaulting
borrower could lose the home itself.
For the most part, predatory lending has been associated with companies that
specialize in marketing to people with poor credit histories or who are simply
strapped for cash. Typical targets are elderly people with high medical bills
or overdue home repairs, middle-class individuals swamped by credit card debt,
and lower-income consumers with less access to reputable lenders. And, since
the trucking industry has been in a slump for a couple years now, owner operators
and owners of smaller trucking companies have been struggling to survive. A
lack of cash to keep things going has put many of these people in a position
where they need to refinance their homes to get that much-needed working capital.
A typical consumer may not know the terms for predatory practices, but many
would-be borrowers will probably recognize some of these behaviors. In a “bait
and switch” scheme, the lender promises one thing but offers something different
at closing, when it really matters. “Equity stripping” results from encouraging
heavy borrowing from home equity, beyond the consumer’s ability to make payments.
“Loan flipping” is multiple refinancing to the point that fees, and possibly
higher rates, become unmanageable. When a lender engages in “loan packing” they
add charges to the loan contract for overpriced and/or unnecessary items.
There are federal laws designed to protect consumers from some of these predatory
lending practices. The Truth in Lending Act requires lenders to give timely
information about loan terms and costs and it allows borrowers on loans secured
by a home to cancel the loan up to three business days after signing the contract.
The Home Ownership and Equity Protection Act requires providers of “high cost”
refinancing or home equity loans to give the borrower key information about
the loan three days before closing. It also prohibits the making of a home equity
loan without regard to a borrower’s ability to pay it back. These laws play
an important role, but the best deterrent to predatory lending is informed and
vigilant consumers.
Some of the most effective preventive measures are only common sense, but in
practice they are all too often ignored. 1) Think through the decision to borrow
before taking the plunge, and be wary of a lender who hurries you. 2) Select
a lender with a good reputation locally, and steer clear of home improvement
contractors or loan brokers who contact you out of the blue. 3) Compare quotes
from at least three lenders, then negotiate for the best deal. Remember, the
loan with the lowest monthly payment is not necessarily the best loan. 4) Be
sure to read and understand all of the loan documents before signing them, keeping
an eye out for discrepancies between what may have been discussed previously
and what is in the fine print.
Refinancing is still a viable way to generate cash for major repairs on your
home, large purchases, debt payoff or any other need you may have. With low
interest rates and high home values, now may be a great time to refinance –
especially if you are only looking to lower your interest rate and aren’t looking
to strip your home of its equity. Unfortunately, prices like this can’t (and
won’t) last forever. When the dust settles and the market “adjusts” itself to
a more realistic level, you don’t want to be holding a $200,000 mortgage on
a home worth $150,000. Please read all of the fine print and don’t let anyone
mislead you into making a bad loan decision. Your financial future may depend
on it.
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2003 10-4 Magazine and Tenfourmagazine.com
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