For most families, buying a home is the biggest and smartest purchase they ever make. One of the keys to success is getting an affordable home loan with fair terms and reasonable costs. Unfortunately, home buyers need to be aware that some loans are not in their best interest. When loans hurt instead of help, they can quickly lead to foreclosure and even bankruptcy.
What are some of the problems connected with predatory lending? Nearly all predatory lending occurs in the “subprime market,” where loans are sold to people with less than ideal credit histories, such as a short work history, high debt, and a record of late payments on credit cards or other debt. Subprime loans have played an important role in helping millions of consumers achieve homeownership, but, unfortunately, some lenders abuse their role and take unfair advantage of vulnerable borrowers. Here are a few examples of problems with predatory loans:
High interest rates and fees. Predatory lenders often charge extremely high interest and fees that are added into the total amount of the loan the borrower must repay. These lenders charge what they can get away with, not a fair amount based on the credit history of the borrower.
Broken promises/“bait and switch.” Sometimes home buyers are offered a new loan or a refinance of an existing loan that seems to meet all of their needs only to find that interest rates and fees have changed when they get to the closing table. Agreeing to last-minute changes can cost thousands of dollars and result in a loan they just can’t afford.
Loans that start low and go high. Adjustable rate loans are popular in today’s market, but many that seem to be affordable are likely to have steep cost increases in the future. Avoid “payment shock” by considering whether you can pay for the loan both now and in the future.
Loan “flipping.” Too many homeowners are persuaded to refinance their mortgage, sometimes repeatedly, when there is no real benefit. Even when a family receives some cash from a refinance, the gains should be weighed against the costs of excessive fees and a higher loan amount. Often a borrower has other options, such as obtaining a second mortgage instead of refinancing the entire existing mortgage.
Steering. Some families who receive subprime loans could qualify for a much more affordable home loan. Predatory lenders use aggressive sales tactics to steer families into unnecessarily expensive loan products.
An upcoming post will address solutions, resources, and tips to avoid these practices of predatory lending. The best protection is to do business with a credible lender. We encourage you to view Bella Casa’s list of referred mortgage lenders.UPCOMING POSTSPart 2: Possible Warning Signs of a Predatory LoanPart 3: Questions to Ask if the Loan is an Adjustable Rate Mortgage (ARM) Part 4: Avoiding Predatory Lending – Smart Proactive Steps + Resources