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:
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
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
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.