Healthy Aging Column – Borrowers Beware: Protect Your Greatest Single Asset
The equity in your home may be your single greatest asset. Many people have worked for years to own their homes free and clear. In areas with high rates of real estate appreciation, these homeowners may be land-rich but cash-poor. This situation makes the homeowner vulnerable to home equity loan fraud. Elderly and minority homeowners especially seem to be targeted by fraudulent home equity loan practices.
Home equity loans allow the owner to borrow money against the home’s equity. Equity is usually calculated by subtracting the amount you owe on the home from the estimated value of the home. The home is the collateral that guarantees the loan. If you are unable to repay the loan, you could lose your home to foreclosure.
Consumer Actions recommends that you should ask these questions before taking out a home loan:
– What is the total amount, including fees and interest, that I will need to pay off this loan?
– What is the annual percentage rate of interest, or APR? If it is at least 10 percentage points higher than rates on Treasury Securities of the same maturity, you must be given more information and special protections.
– Is the interest rate fixed or adjustable?
– How does the quoted rate compare with those of other lenders?
– What fees, points and closing costs will be added to the loan?
– Is there a "balloon" payment?
– How much are my monthly payments and for how many months?
– Can I really afford these loan payments?
– Do I really need the repairs or improvements?
– Will there be a prepayment penalty if I pay the loan off early or refinance with another lender?
To protect homeowners from home equity fraud, Consumer Action and the Federal Trade Commission have identified the following practices that may constitute home equity loan fraud.
Easy financing for home repairs. The repair work is often sub-standard and the loans often have high interest rates and hidden costs. The monthly payments may be out of line with borrower’s income, and risk of foreclosure is high.
Taking out home equity loans for the needs of caretakers, friends or family members. The caretaker, friend or family member may promise to repay the loan but often does
not. The monthly payments may be out of line with borrower’s income, and the risk of foreclosure is high.
Broker solicitation for mortgage refinancing. The broker may encourage the owner to borrow more money than they need and roll closing costs into the loan. The broker makes money from commissions, up-front fees and closing costs. The monthly payments may be out of line with borrower’s income, and risk of foreclosure is high.
Deed forgeries. Scam artists forge the homeowner’s signature on a blank "grant deed." Much of the information needed to complete the grant deed can be found through public records. With the forged grant deed, the scam artist can go to a bank and borrow against the equity in the home. To deter this fraud, notaries are now required to take a thumbprint of anyone having a deed notarized.
Offering foreclosure protection. When a homeowner is falling behind on mortgage payments, a person may contact them and offer to save them from foreclosure for a fee. The person then vanishes with the fee. Another scheme is to convince the troubled homeowner to sign over the deed in exchange for protection from foreclosure. The homeowner is then served with eviction papers.
Home equity skimming. When a homeowner agrees to owner financing in order to sell the home, they may fail to record the lien on the deed. If the lien is not recorded, the new owner may go to the bank as soon as the deed is recorded, take out a home equity loan and disappear. The original owner is then left with nothing but the small down payment
Signing blank documents. The homeowner may be tricked into signing a lien document or deed transfer disguised as service contract or register mail receipt.
Store-front lenders. Offices set up in low income or minority neighborhoods for short periods of time get homeowner’s signatures on home equity loan documents and then disappear. The loans may be sold to other lenders who can then foreclose if the homeowner has not been able to keep up the payments because they couldn’t find the office or address of the lender.
There are several ways to protect from home equity fraud.
1. Never rush into signing a loan secured by your home.
2. Do not let family members, friends or caretakers convince you to take out a home equity loan for their benefit.
3. Shop around if you decide a home equity loan is the right thing for you to do.
4. Review any contract with someone you trust and have a lawyer review the document. Many bar associations, senior organizations and colleges have low-cost legal services.
5. Never sign any document that contains blank lines that could be filled in after you sign.
6. Make sure you understand the contract. Have all the costs in writing before you sign any documents.
7 Be cautious if a lender recommends a contractor or vice versa. Deal only with licensed contractors.
8. Be cautious if contractors come to your home following a disaster offering home equity loans to cover repair costs. Your insurance company or relief programs may cover the costs.
9. If you negotiate a contract with a loan broker or personal finance company in a language other than English, get the written contract in English and your spoken language.
10. Remember, you have the right to cancel any home equity contract within three days (excluding Sunday) of (1) signing the contract, (2) receiving disclosure of loan terms, and (3) receiving two copies of "right of rescission" notice.
For more information, contact Consumer Action at info@consumer-action.org, (415) 777-9635, (213) 624-8327 or TTY: (415) 777-9456. Consumer Action provides consumer advice and referrals to complaint-handling agencies. If you call, leave a message and a counselor will call you back. Counselors are available in Chinese, English and Spanish.
For additional articles on Healthy Aging, go to the Colorado State University Cooperative Extension Web site at www.ext.colostate.edu. Go to info-online, click on consumer and family, and then scroll down to Healthy Aging.
By Janet Benavente, Family and Consumer Extension Agent
Colorado State University Cooperative Extension, Adams County