If you are considering a home equity loan, be sure to check out and beware of these “home equity loan scams”: Equity Stripping, Balloon Payment, Loan Flipping, ‘Home Improvement’ Loan, Credit Insurance Packing, Mortgage Servicing Abuses, and Signing Over Your Deed.
Home equity loan lending companies are infamous for granting home equity loans with some outrageous hidden terms and costs to unsuspecting homeowners. Such scams can sometime prove to be very expensive and may even cost homeowners their homes.
The main prey to these scam artists are primarily senior citizens, minorities, low-income families, and people with a poor credit history. If you are among any of these groups, be wary of companies who are eager to loan you money.
These manipulative lenders may alter loan terms with hide extra charges, and conceal “bait-and- switch” techniques. Be wary of following home equity loan scams as suggested by The Federal Trade Commission:
Home Equity Loan Scam: Equity Stripping
You need a home equity loan but your monthly income is not enough to sustain the payment. In such case, the lender may try to scam you by brainwashing and encouraging you to “pad” your stated monthly income on the application so that your chance of approval increases. Be careful!
If you sign the application and fail to meet monthly payments, the lender is not going to hesitate to foreclose on your home and strip you off the equity you’ve built over the years. Chances are that you will lose your home.
Home Equity Loan Scam: The Balloon Payment
If you are not able to make your repayments in time, the lender might try
and encourage you to lower your monthly payments by refinancing your mortgage so that you can save your home from foreclosure. Be careful while doing this. Read, understand and examine the loan terms carefully.
Most often, the lower payments are likely the result of a “balloon payment.” With this type of loan, you have to repay only the interest until the end of the loan’s term. You must pay the entire amount you borrowed, at the end of the term This is called balloon payment. If you fail to pay the entire amount at the end of the loan’s term, you will have to face foreclosure and eventually the loss of your home.
Home Equity Loan Scam: Loan Flipping
Are you one of those who has had mortgage for years? Do you have low
interest rate and manageable payments? Can you use a little extra cash?
Possibilities are that some lender may try to encourage you in refinancing and possibility of freeing up some extra money, and the opportunity to start making your hard earned equity “work for you.” He might try to make you sign papers to refinance. After some time when you make a few regular payments on the loan, the lender might come with another offer asking you to refinance your original loan for a larger sum of money. You may get trapped and agree to his terms.
Beware! This is “flipping”. Flipping occurs when a lender charges you higher points and fees every time you refinance while maintaining the likelihood of increasing your interest rate. Additionally, if there is a prepayment penalty, you will have to pay that amount each time you take out a new loan.
This process may continue in a cycle and with each refinancing, your debt increases. You actually end up paying an unreasonably high price for a little extra cash. In case you are not able to make the payments, you will face foreclosure and the loss of your home.
Home Equity Loan Scam: The ‘Home Improvement’ Loan
Most shady home improvement contractors and unscrupulous lenders often use this trick for home improvement loan. Some local home contractor visits your house and offers to remodel your home, bathroom, or kitchen on amazing rates. Maybe you want your home to get remodeled but have no fund. Now he will offer you to help with some financing with a lender he knows. Once you agree, the contractor takes you to the lender and with all the confusing paperwork, you just sign them. BEWARE! You made a mistake. Never sign such paper without reading carefully and understanding all the terms. These papers could be documents for home equity loan with high points, high fees, and high interest rate. If you fail to make the payments, the lender could foreclose on your house.
Home Equity Loan Scam: Credit Insurance Packing
When you agree to a mortgage or home equity loan, you should always be
wary of tacked-on charges. Shady lenders can make you sign terms that may look good but they are actually scams.
You may think that you have agreed to an affordable mortgage but the documents actually include additional fees for credit insurance and other “benefits” that you never asked for.
The lender will never explain the hidden terms so that you don’t notice them and if you even notice these terms, you may not object fearing losing the loan itself. Sometimes the lender makes you feel that the insurance “comes with” the loan itself with no extra cost. Be careful!
Home Equity Loan Scam: Mortgage Servicing Abuses
When it comes to mortgages and home equity loans, try to choose reputable lenders. Shady lenders and companies may surprise you with all types of charges and abuses. Unwanted and unexpected charges such as late fee, legal fee, mortgage services are all parts of such scam. Sign a loan agreement only after it is reviewed by an attorney.
Home Equity Loan Scam: Signing Over Your Deed
Are you currently having trouble paying your mortgage? Is your lender
threatening to foreclose on your home?
Beware, when you sign your deed over to someone else. Consult an attorney before signing any such deed.
A lender who knows that you are in some kind of a trouble might take advantage of such tricks. He might offer you for new financing in return of a deed of your property to his name. Don’t fall into any such trap. Once the lender has the deed to your property, he may treat it as his own property and can even borrow against it, or even sell it to someone else. He may treat you as a tenant and your mortgage payments as rent. If you make delay in payments, he can even evict you from your home.