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Home Equity Loans: Beware of Predatory Lending

An older woman's home was paid off when a salesman talked her into a 12% home equity loan to pay off credit cards. He said she could reduce her monthly payments from $500 to $350. He didn't tell her about the large "balloon" payment that was due in three years. She lost her home to foreclosure.

Another woman knew her credit rating wasn't the best, but she needed to pay medical bills. She thought the 16% home equity loan offered by "the helpful man who called on the phone" was the best she could get. She could have gotten a better rate by shopping around.

Thinking about borrowing money? Because of the risks involved, think twice before accepting offers to use the equity in your home to secure the loan.

Many elderly, low- or moderate-income, and minority homeowners have been hurt by "predatory lenders." These aggressive, dishonest lenders advertise their services to people in financial need–people who may have fallen behind on property taxes, need money for medical bills, or face costly home repairs.

Instead of offering a fair loan, a smooth-talking salesperson may set you up with high interest rates, outrageous fees, and unaffordable repayment terms. You could end up with a loan that you cannot afford to repay, and risk losing your home to foreclosure.

How to Be a Smart Borrower

Be cautious. Be suspicious of anyone who offers you "bargain loans," whether they send you an offer, call you on the phone, or come to your door. Don't rely on salespeople who promise easy credit. Don't be fooled by loan offers you see on television or receive in the mail–they don't always tell the full story.

Shop around. If you need a loan, see if you are eligible to get one from a local bank, credit union, or mortgage company. Compare total costs of the loan as well as interest rates. Understand the points and fees. A loan with a lower monthly payment is not always the better deal; it may have a high balloon payment that is due in a few years.

Be wary of financing offered by a home improvement contractor. Dishonest mortgage brokers and contractors sometimes work together to take advantage of homeowners. Make sure you understand what kind of financing you are being offered. For example, is it an unsecured home improvement loan, a second mortgage, or a refinancing? To protect yourself, shop around for financing from lenders not associated with the contractor. Ask a lawyer or housing counselor to review the financing terms with you.

Call the State to check out mortgage lenders. Call the Maryland Office of the Commissioner of Financial Regulation at 410-230-6097 or toll-free at 1-888-784-0136 to find out if the mortgage lender is licensed, as required, and to find out if complaints have been lodged against the lender.

Know your credit rating and credit score. Sometimes people who have good credit are charged higher "subprime" rates and fees for loans because they don't know that their credit is good. Get your credit report from the three credit bureaus below. Maryland residents are entitled to a free copy of their credit reports each year.
Equifax: (800) 685-1111, www.equifax.com
Experian: (888) 397-3742, www.experian.com/consumer
TransUnion: (800) 888-4213, www.transunion.com

You can also request your credit "score" for a fee from the credit bureaus, or a lender can give you a free copy when you apply for a loan. Your credit score is a number that lenders use to decide how good a credit risk you are. Most credit scores range from 300 to 850, and the higher the score, the better your credit. Most lenders consider scores over 700 as "good" to "excellent" scores. Avoid lenders who won't give your score to you.

Ask questions. Before borrowing money, know exactly what the lender is offering. You have a legal right to know the total cost of the loan, the annual percentage rate, the monthly payments, and how long you have to pay back the loan. Ask questions until you understand everything. It is important to know more than the monthly payment.

Read carefully before you sign. Always assume that any paper you sign is a contract. Before you sign the loan papers, ask a lawyer or trusted friend to go over them with you. Don't sign a document with blank spaces.

Avoid "balloon" payments. One way that lenders make loans seem attractive is to make the monthly payment small but require a big balloon payment at the end of the loan period. Lenders may promise to help you refinance when it comes time to pay it off, but watch out! Predatory lenders make money by charging excessive fees every time they refinance the loan.

See a housing counselor to discuss your options. You can locate counselors certified by the U.S. Department of Housing and Urban Development (HUD) by calling 1-888-466-3487.

Seniors: Consider a Reverse Mortgage
If you are a homeowner age 62 or older, a reverse mortgage may be better than getting a home equity loan. A reverse mortgage gives you money that you don't have to repay until you move, sell the house, or die. You choose to get the money as a lump sum payment, a monthly income, or a combination of both. If you get a reverse mortgage, you can't lose your house to foreclosure the way you could with a home equity loan. A reverse mortgage does use the equity in your home, so consider your options carefully. Get advice from a lawyer or a financial adviser about whether a reverse mortgage is right for you.

AARP and AARP Maryland provided the information in this issue. Material used by permission. Much more information is included in AARP's free guide, "Borrower's Guide to Home Loans." Call to request a copy: 1-800-424-3410 or visit www.aarp.org


Maryland Attorney General's Consumer Protection Division
Consumer hotline: (410) 528-8662 or 1 (888) 743-0023 toll-free


Attorney General of Maryland 1 (888) 743-0023 toll-free / TDD: (410) 576-6372
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