Home Equity Loan Scams

Home Equity Loans

Loan Scam #1: Equity Stripping

If you are considering a home equity loan, be sure to work with a reputable lender.

Scam artists and unscrupulous, fly-by-night lending companies are infamous for granting home equity loans with outrageous hidden terms and costs to unsuspecting homeowners.

These bogus loans can ultimately cost homeowners their homes.

These scam artists prey heavily upon senior citizens, minorities, low-income families, and people with poor credit.

If you are among these groups, be especially wary of companies who are eager to loan you money.

Manipulative lenders may alter loan terms, hide extra charges, and conceal "bait-and-switch" techniques.

The Federal Trade Commission warns homeowners to be wary of the following:

If a lender tells you that you're eligible for a loan even though your monthly income is not enough to sustain the payments, they may be aiming to steal your home equity.

If this is the case, they also might encourage you to "pad" your stated income on the application to increase your chance of approval.

If you sign on the dotted line and fail to meet monthly payments, the lender will usually not hesitate to foreclose on your home, stripping you of the equity you've built over the years. In most cases, you will lose your home.

Seek the advice of a reputable lender.

Loan Scam #2: The Balloon Payment

If you are facing foreclosure due to late or missed payments, a lender may offer to lower your monthly payments and refinance your mortgage, saving your home from foreclosure.

You must examine their loan terms carefully.

The lower payments are likely the result of a "balloon payment." With this type of loan, you repay only the interest until the end of the loan's term.

At the end of the term, you must pay the entire amount that you borrowed--the balloon payment. If you can't produce the sum of the payment, you will face foreclosure and the loss of your home.

Loan Scam #3: Loan Flipping

You might be someone whose had your mortgage for years. Your interest rate is low and your payments are manageable. But you, like most of us, could use a little extra cash.

One day a lender calls and asks if you'd be interested in refinancing. He/she mentions the possibility of freeing up some extra money, and the opportunity to start making your hard earned equity "work for you."

So you sign the papers to refinance. Some time goes by and you make a few regular payments on the loan. But the lender calls back with another offer.

This time they ask if you'd like to refinance your original loan for a larger sum of money. You're thinking about that vacation you've been wanting to take. You agree to go ahead with it.

This technique, called "flipping," occurs when the lender charges you higher points and fees each time you refinance, while also maintaining the likelihood of increasing your interest rate.

In addition, if a prepayment penalty exists, you will have to pay that amount each time you take out a new loan.

After you've gone through this cycle, you have some extra money and a lot more debt, which is drawn out over a much longer period of time.

In truth, sometimes the extra money you receive is less than you paid for the fees involved in the refinancing. You're paying interest on the fees themselves.

Overall, with each refinancing, your debt increases, and you end up paying an unreasonably high price for a little extra cash.

And if you begin to fail to make payments, you will face foreclosure and the loss of your home.

Loan Scam #4: "Home Improvement" Loan

A common trick that's perpetrated by shady "home improvement contractors" and unscrupulous lenders goes something like this:

Your doorbell rings. When you open the door, you meet a "local" contractor who is doing work in your area.

He offers to remodel your bathroom or put a new roof on your house, and his price sounds amazingly reasonable.

You're interested but you can't afford to do the work without a loan. He tells you he can put together some financing with a lender he knows. You agree to the plan, and the contractor begins his work.

Soon after, the lender stops by and hurries you to sign a bunch of papers. You may not fully understand the papers, or perhaps you don't agree with everything you see.

But you can't afford to have the contractor leave at this point, so you sign them.

Once it's too late, you realize that the group of documents you signed were essentially a home equity loan with high points, fees, and interest rate. This loan encumbers your title to the property. If you don't make the payments, you could lose your house.

If you haven't done your homework in checking out the contractor, you may find that his work is shoddy or incomplete--or that he isn't even a licensed contractor.

If the lender works regularly with the contractor making these kinds of loans, he won't work with you to hold the contractor accountable.

Loan Scam #5: Credit Insurance Packing

When you agree to a mortgage or home equity loan, be wary of tacked-on charges. Shady lenders are infamous for getting you to sign on the dotted line based on what appear to be good terms, and then sticking it to you with other charges such as credit insurance.

This scam goes something like this: You've agreed to a mortgage that you think is affordable. The lender gives you the papers to sign at closing.

The documents include additional fees for credit insurance and other "benefits" that you did not request, and that you don't want.

Hoping you won't notice, the lender avoids explaining how much extra these monthly charges will cost you.

If you notice these charges, you might hesitate to object in fear of losing the loan altogether. Or perhaps the lender makes it sound as though the insurance "comes with" the loan, implying that there is no extra cost.

If you do protest, the lender may say that, if you don't want insurance on the loan, the papers will have to be rewritten, and that the manager may reconsider the loan altogether.

When and if you purchase the insurance, you're really paying extra for the loan by buying something you don't want and probably won't need.

Related to this, be sure to see Loan Scam #6: Mortgage Servicing Abuses.

Loan Scam #6: Mortgage Servicing Abuses

When it comes to mortgages and home equity loans, working with reputable lenders is very important. Shady companies are likely to surprise you with all types of charges and abuses.

A solid loan agreement, reviewed by an attorney, will usually help you sidestep these types of issues.

Mortgage servicing abuses go something like this:

After completing the papers and getting your mortgage, you receive a memo from the lender stating that your monthly payments are going to be significantly higher than expected.

They say that your instalments include escrow for various taxes and insurance, despite the fact that you specifically arranged to make those payments independently, with the approval from the lender.

Some time later you receive another letter from the lender saying that you are being charged for late fees, even though you know that your payments have been punctual.

Or, you might get a message saying that you've failed to uphold required property insurance, and the lender is purchasing costlier insurance at your expense.

Additional charges that you don't recognize like "legal fees" are regularly added to the amount you owe, increasing your monthly instalments or your final payment upon completion of the principle.

The lender doesn't supply you with an accurate or comprehensive account of these charges. When you ask for a payoff statement to refinance with a different lender, you receive a document that's either inaccurate or incomplete.

The lender's deception makes it nearly impossible to find out how much you've paid and how much you still owe.