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Borrowers Beware Tips Pennsylvania Office of Attorney General

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					Borrowers Beware                                     “Home Improvement
Use a lender you know and trust. An                  Loan Scams”
unscrupulous lender may attempt one of these         A contractor offers to do some work on your
common scams:                                        home, saying he can also arrange the financing                Pennsylvania
                                                     through a lender. Once you agree, the
Equity Stripping                                     contractor begins work. The lender then appears        Office of Attorney General
This is a practice where loans are made to           with papers to sign. He may rush you into signing          Public Protection Division
                                                     a document before you have time to read it, or
consumers without regard to the borrower’s
ability to pay. For instance, an unscrupulous        the contractor may threaten to stop working until        Bureau of Consumer Protection
lender may encourage you to overstate your           the papers are signed. You sign, only later
income on the loan application in order to get the   realizing you’ve just agreed to a home equity
loan approved, knowing you will not have the         loan with high rates, points and fees.
income to cover the monthly payments. You            Additionally, the contractor now has no interest
may also be encouraged to borrow more than           in finishing the job, since he has already gotten
you need so you will have extra spending money.      paid by the lender.
As soon as you default on the loan, the lender
will foreclose, taking your home and the equity in   Signing Over the Deed
it.                                                  You can’t pay your mortgage and face
                                                     foreclosure. A “lender” contacts you, offering
Loan Flipping                                        help. First, the lender requires you deed the
A lender convinces you to refinance your home.       property to him, claiming this is a temporary
You agree and make a few payments on the new         safety measure to prevent foreclosure. It is not.
loan. The lender then approaches you offering a      Once the lender has the deed, he owns your                  Pennsylvania Toll Free Hotline:

                                                                                                            1-800-441-2555
bigger loan for something such as a “dream           property. He can borrow against it or sell it to
vacation.” When you accept the new offer, the        someone else. The lender can treat you as a
lender refinances the original loan, lending         tenant, using the mortgage payments as rent.
additional money. In doing so, you are charged       Once you default on the payments, the lender
high points and fees and an increased interest       can evict you from your own home.                       www.attorneygeneral.gov
rate for each refinancing. You’ll also have to pay
any prepayment penalties each time. The result
is more debt over a longer period of time.

 Tips                                                THE LENDER                                           THE CLOSING
                                                     When you have chosen a lender that can meet          After closing, if you are having second thoughts,
 SHOP AROUND                                         your initial requirements, try to negotiate.         the Truth in Lending Act gives most borrowers
 Once you have determined which type of loan         Perhaps the lender could lower the APR, or           at least three business days to cancel the deal.
 is best for you, check with several lenders,        remove a term you don’t like. Make sure to ask       This “right of rescission” must be made in
 compare terms, rates and conditions. Is the         the lender for a blank copy of the forms you will    writing to the creditor. The lender then has 20
 application fee refundable if you don’t qualify     get at closing and review them carefully. Be         days to return any money you paid and must
 or decide not to accept the loan? What is the       certain you can afford the loan; if you can’t, you   release any security interest in your home.
 APR (annual percentage rate)? Is it fixed or        could lose your home.
 adjustable? Are there caps on the interest                                                               WHERE TO GO
 rate? Does the loan require a balloon payment       THE DEAL                                             If you think you have been taken advantage of
 at the end of the term? What are the points?        Before closing, ask for an explanation of            by a lender or if you want more information on
 Are there closing costs? Is mortgage or credit      anything you don’t understand. Never sign a loan     smart borrowing, contact the Bureau of
 insurance required? Is there a prepayment           agreement if the terms differ from what you          Consumer Protection at 800-441-2555
 penalty? Will you need a home appraisal to see      were originally told or if there are blanks to be    (www.attorneygeneral.gov) or the Federal
 if you qualify?                                     filled in later by the lender. Finally, make sure    Trade Commission at 877-382-4357
                                                     you get a copy of all the documents you sign         (www.ftc.gov).
                                                     before you leave the lender.
                                                         Types of Loans                                          mortgage, including
                                                                                                                                                  not result in the foreclosure of your home;
Your home is likely to be your                                                                                   settlement costs, discount
                                                                                                                                                  however, missing payments on a second mortgage
biggest investment and financial                                                                                 points and other fees. A
                                                   You may see advertisements                                    prepayment penalty may
                                                                                                                                                  or home equity loan may.
asset. That’s why it is extremely
                                                                                                                 apply for paying off the
important to know the facts when                        for home equity loans,                                   original loan early. The
considering refinancing or                                                                                       amount you save will vary        Loan to Value Ratio
borrowing against your home equity.                   debt consolidation loans,
                                                                                                                 depending upon factors such      (LTV)
While most lenders are legitimate               second mortgages or offers to                                    as interest rates, refinancing   The LTV is the percentage of the loan amount to
and honest, unfortunately there are                                                                              costs and tax consequences.      the appraised value (or sales price) of your
some unscrupulous ones that will try              refinance your current loan.                                   Borrowers may have the           property. With a good credit history, most
to take advantage of consumers.                                                                                  option to refinance from an      lenders will allow you to borrow up to 85% of
                                                Understand that each of these                                    adjustable rate mortgage         the appraised value of your home, minus the
Some of those lenders make it sound                                                                              with a high interest rate        amount you still owe on your first mortgage.
as if tapping into your home equity         loans use your home as collateral,                                   subject to increases to a        You should never agree to a loan that is worth
is the answer to obtaining quick                                                                                 lower fixed-rate mortgage.       more than the value of your home.
cash or paying off credit card bills.        which means you are putting that
When interest rates are low, these                  property in jeopardy if you              A Debt Consolidation Loan is a single loan, such
options may appear especially                                                                as a home equity loan or the refinancing of an       Balloon Mortgages
attractive.                                        cannot make the payments.                 existing loan, used to pay off multiple debts -      A short-term, fixed rate mortgage with fixed
                                                                                             credit card bills, for example. Debt                 monthly payments for a set number of years
                                        Home Equity Loans use a credit line to borrow        consolidation loans often offer a lower monthly      (usually 5-10) followed by a final payment of
The Office of Attorney General          against the value (equity) of your home. These       payment, but with a longer term to pay off the       the principal is known as a balloon mortgage.
wants Pennsylvania consumers to be      loans provide you with large amounts of cash at      loan. This means you may be paying more in
smart consumers. With this goal in                                                                                                                Payments are usually lower because only the
                                        relatively low interest rates, which may be tax      interest in the long run.                            interest is paid each month. For example,
mind, the Bureau of Consumer            deductible. Some loans have a final, balloon                                                              borrowing $10,000 in a balloon mortgage means
Protection has developed this           payment at the end of the term. You must either      A Second Mortgage is an additional mortgage on       that a large payment is due in one lump sum at
brochure to help you become             pay this lump sum or refinance the loan.             real estate that has already been pledged as         the end of the term. If you cannot make the final
loan smart.                                                                                  collateral for an earlier mortgage. Second           payment or refinance the amount, you can lose
                                        Refinancing means paying off an existing             mortgages differ from first mortgages in several     your home.
                                        mortgage loan with the proceeds from a new           ways: they have a higher interest rate and are for
Reading this brochure carefully will    loan, using the same property as collateral. It is   a shorter term, usually 15 years or less. They
help you understand the different       important to note that you may be subject to the     may also require a balloon payment at the end of
types of loans available to             same costs you paid to get your original             the loan.                                            Mortgage Insurance
homeowners and help familiarize                                                                                                                   Lenders will often require borrowers who put less
you with the issues associated with                                                                                                               than 20 percent down on a home mortgage to

                                                   UNDERSTAND
                                                                                                                                                  purchase Private Mortgage Insurance (PMI).
home lending. Choosing a loan can                                                            Secured                                              The insurance protects the lender in cases where
be confusing and, if you aren’t sure                                                         vs. Unsecured Loans                                  the borrower defaults on the loan. Provisions of
about certain terms, you may agree                                                           When you applied for a credit card, you did not
                                                 ALL THE TERMS
                                                                                                                                                  the federal Homeowners Protection Act, which
to something you’ll regret later.                                                            have to put up your house, car or other property     took effect in 1999, establish rules for the
                                                                                             as collateral. You simply promised to pay your       automatic termination of PMI policies in certain
                                                                                             bills. Many people end up paying off credit card
                                               BEFORE AGREEING
Be certain to understand all the                                                                                                                  instances, such as when the borrower’s equity in
terms and conditions before                                                                  debt by borrowing against their homes, either by     the home reaches a certain level. Because this
                                                                                             refinancing or through a debt consolidation loan     coverage can cost a borrower several hundred
agreeing to any loan, or you may put

                                                  TO ANY LOAN!
                                                                                             or second mortgage. This may not be right for        dollars each year, knowing when this insurance is
your most valuable asset at risk —                                                           everyone. Defaulting on credit card payments will    no longer required can save you money.
your own home.

				
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