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					President’s Column Aug. 1, 2002 –distributed by Texas Association of REALTORS® Buyer beware: Home equity loan scams If you own your home, it probably ranks as your most valuable asset, right? Forget the big TV or the new car in the driveway; your chunk of residential real estate is worth more over the long haul than probably any other possession. And as consumer confidence slides in today’s volatile stock market and in questionable corporate accounting practices, more and more people are buying real estate – not just as a place to live, but also as investment security for the long haul. In fact, sales of new and existing homes have reached $522 billion so far this year, up from $451.3 billion a year ago. Many people are also looking into home equity loans – money borrowed based on your equity in your home – because their real estate investment is stable. Home equity loans can be a great thing if you’re thinking of adding onto your house, sending your children to college, or making a large purchase. Unfortunately, some consumers may be putting their most valuable asset at risk, if the home equity loan turns out to be a sham. Who’s at risk? As in any good thing, there’s always someone out there trying to make a quick buck based on the latest trend. For that reason, all homeowners should be careful when borrowing money based on their home equity, but especially the elderly, minorities and those with low incomes or poor credit. This is because some unscrupulous lenders target these borrowers, who may be putting their home on the line and not even realize it. The key is awareness. The Federal Trade Commission urges consumers to know about these loan practices to avoid losing our homes. But what is it that you’re looking for? And how do you know if it’s happening to you? The FTC cites such abusive lending practices as equity stripping and loan flipping – hiding loan terms and packing a loan with extra charges. Here’s a primer on each type of home equity scam, and how to spot them so you don’t get taken.

Equity stripping Say that you don’t have much income coming in each month and you could really use extra cash. You’ve been in your home a number of years and have been able to build up substantial equity. A lender tells you that you could get a loan, even though you know your income isn’t really enough to keep up with the monthly payments. The lender encourages you to “pad” your income on your application form to help get the loan approved. This is your first warning sign that the lender may be out to “steal” the equity you have built up in your home. The lender doesn’t care if you can’t keep up with the monthly payments if the intent is to foreclose and take ownership of your home. However, thanks in large part to the Texas Association of Realtors, Texas’ law governing home equity lending provides some of the strongest consumer protections in the nation. Even so, the lesson here is simple: If you know you won’t be able to make the payments, don’t take out the loan. Wait until it’s a better time financially, or consider other sources. It’s not worth losing your house. Hidden loan terms You’ve fallen behind in your mortgage payments and could be facing foreclosure. Another lender offers to save you from foreclosure by refinancing your mortgage and lowering your monthly payments. If you do this, be sure to look carefully at the loan terms. The payments may be lower because the lender is offering a loan where you repay only the interest each month. At the end of the loan term, the principal – meaning the entire amount that you borrowed – is due in one lump sum called a balloon payment. If you can’t make the balloon payment or refinance your home, you could lose it. Loan flipping Suppose you’ve had your mortgage for years. The interest rate is low and the monthly payments fit nicely into your budget, but you could use some extra money. A lender calls to talk about refinancing, and using the availability of extra cash as bait, says it’s high time the equity in your home started “working” for you. It sounds good, so you agree to refinance your loan. After you’ve made a few payments on the loan, the lender calls to offer you a bigger loan for a vacation or the new car you’ve been thinking of getting. If you accept the offer, the lender refinances your original loan and then lends you additional money. In this practice – often called “flipping” – the lender charges you high points and fees each time you refinance, and may also increase your

interest rate. If the loan has a prepayment penalty, you will have to pay that penalty each time you take out a new loan. The result is that not only do you have extra money, but you also have a lot more debt that is stretched out over a longer period of time. The extra cash you receive may be less than the additional costs and fees you were charged for the refinancing. And what’s worse, you’re now paying interest on those extra fees charged in each refinancing. With each refinancing, you’ve increased your debt and are paying a very high price for some extra cash. If you get in over your head and can’t pay, you could lose your home. The lesson here is if you’re serious about refinancing, call your current lender or another reputable lender and find out what your options are. You’ll be much better off in the long run. The home improvement loan A contractor calls or knocks on your door and offers to install a new roof or remodel your kitchen at a price that sounds reasonable. You tell him you’re interested, but can’t afford it. He tells you that it’s no problem – he can arrange financing through a lender he knows. You agree to the project, and the contractor begins work and you’re asked to sign papers to seal the deal. Stop! Take the papers to a real estate attorney or someone you trust and arrange to have them looked over carefully. It could be that the papers you might have signed were for a home equity loan. If you’re interested in having work done on your house, you make the call. Get bids, ask for referrals and read over anything you’re asked to sign. The bottom line is that, while there are a lot of scams out there, being aware and taking the time to do the research can save you a lot of heartache in the end. For more information, visit the Federal Trade Commission’s Web site at www.ftc.gov. ###


				
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