Unscrupulous lenders use home equity scams to separate you from your
hard-earned money. Avoid becoming a victim by being on the look out for the
following five deceptive practices.
Equity stripping occurs when the lender gives you a loan based on the equity
in your home, not on your ability to repay the loan based on your income and
current financial situation. A common result is that homeowners default on
the loan and the lender takes the house as collateral.
Lenders that have you refinancing your loan and borrowing more money are
practicing what's called "loan flipping." Each time you refinance you are
paying additional fees and interest points, which increases your debt.
While refinancing can be a legitimate way to save money, continuously
refinancing costs you money since the interest rates on your mortgage will
not have changed significantly between each refinance period.
Understanding what you are paying for in your loan will help you to avoid
credit insurance packing. Again, credit insurance is a legitimate product;
it insures your loan in situations like loss of job or death. But if your
lender adds it onto your loan unnecessarily, you are paying for a service
you don't need. One way to avoid this problem is to purchase credit
insurance from a reputable third party.
At times lenders may offer special terms when you apply for your loan, but
pressure you to agree to more costly terms when you come in to sign the
paperwork. This is a bait and switch tactic, but one that can be avoided if
you know and understand the terms of the loan. Be sure you don't sign an
agreement for a loan if you are confused about the terms or if they seem
different than originally explained. Federal law states that written credit
and loan term information must be provided when you apply for a loan and
before you sign a contract.
Deceptive loan servicing occurs when the lender doesn't give you accurate or
complete account statements and payoff figures. This means it will be
difficult, if not impossible, for you to figure out how much of the loan you
have repaid and how much you still owe. When this happens it is very easy
to overpay on the loan.
In addition to arming yourself with knowledge, be sure to shop around for
the best loan terms and interest rates. Consult a financial advisor, your
local Fair Housing Office, legal aid, or any senior services organization
before getting a loan.
Sources: Myers Internet Services, www.mortgagefaq.com and www.doityourself.com.