FTC FACTS for Consumers

FOR THE CONSUMER 1-877-FTC-HELP

ftc.gov FEDERAL TRADE COMMISSION

Need a Loan?

Think Twice About Using

Your Home as Collateral

f you need money to pay bills or make home improvements, and think the answer is in 

refinancing, a second mortgage, or a home equity loan, consider your options carefully. 

If you can’t make the required payments, you could lose your home as well as the equity 

you’ve built up. That’s why it’s important not to let anyone talk you into using your home 

to borrow money you may not be able 

to afford to pay back.

Not all loans or lenders are 

created equal. Some unscrupulous 

lenders target older or low-income 

homeowners and those with credit 

problems. These lenders may offer 

loans based on the equity in your 

home, not on your ability to repay the 

loan. High interest rates and credit 

costs can make it very expensive to 

borrow money, even if you use your 

home as collateral.

Talk to an attorney, financial advisor, 

or someone else you trust before you 

make any decisions about borrowing 

money. Non-profit credit and housing 

counseling services also can be useful 

in helping you manage your credit and 

make smart decisions about loans.

You can take some steps to protect 

your home and the equity you’ve built 

up in it. Here’s how.

1. Shop Around.

Costs can vary greatly.

Contact several lenders — including banks, savings and loans, credit unions, and mortgage 

companies. Ask each lender about the best loan you would qualify for. 

Early Warning Signs

Avoid any lender who:

• tells you to falsify information on the loan 

application. For example, stay away from a 

lender who tells you to say that your income is 

higher than it is.

• pressures you into applying for a loan or 

applying for more money than you need.

• pressures you into accepting monthly payments 

you can’t make or could have trouble making.

• fails to provide required loan disclosures or tells 

you not to read them.

• misrepresents the kind of credit you’re getting, 

like calling a one-time loan a line of credit.

• promises one set of terms when you apply, and 

gives you another set of terms to sign — with no 

legitimate explanation for the change.

• tells you to sign blank forms — and says they’ll 

fill in the blanks later.

• says you can’t have copies of the documents that 

you’ve signed.

I
Facts for Consumers 

Compare:

• The annual percentage rate (APR). The 

APR is the single most important thing to 

compare when you shop for a loan. It takes 

into account not only the interest rate, but 

also points (one point equals one percent 

of the loan amount), mortgage broker fees, 

and certain other credit charges the lender 

requires the borrower to pay, expressed as a 

yearly rate. Generally, the lower the APR, 

the lower the cost of your loan. Ask if the 

APR is fixed or adjustable — that is, will it 

change? If so, how often and how much?

• Points and fees. Ask about points and other 

fees that you’ll be charged. These charges 

may not be refundable if you refinance or 

pay off the loan early. And if you refinance, 

you may pay more points. Points usually are 

paid in cash at closing, but may be financed. 

If you finance the points, you’ll have to pay 

additional interest, increasing the total cost of 

your loan.

• The term of the loan. How many years will 

you make payments on the loan? If you’re 

getting a home equity loan that consolidates 

credit card debt and other shorter-term loans, 

remember that the new loan may require you 

to make payments for a longer time.

• The monthly payment. What’s the amount? 

Will it stay the same or change? Find out if 

your monthly payment will include escrows 

for taxes and insurance.

• Balloon payments. This is a large payment 

usually at the end of the loan term, often 

after a series of lower monthly payments. 

When the balloon payment is due, you must 

come up with the money. If you can’t, you 

may need another loan, which means new 

closing costs, as well as points and fees.

• Prepayment penalties. Prepayment penalties 

are extra fees that may be due if you pay off 

the loan early by refinancing or selling your 

home. These fees may force you to keep a 

high-rate loan by making it too expensive to 

get out of the loan. If your loan includes a 

prepayment penalty, understand the penalty 

you would have to pay. Ask the lender if you 

can get a loan without a prepayment penalty, 

and what that loan would cost. Then decide 

what’s right for you.

• Whether the interest rate for the loan 

will increase if you default. An increased 

interest rate provision says that if you miss 

a payment or pay late, you may have to pay 

a higher interest rate for the rest of the loan 

term. Try to negotiate this provision out of 

your loan agreement.

• Whether the loan includes charge for any 

type of voluntary credit insurance, like 

credit life, disability, or unemployment 

insurance. Will the insurance premiums be 

financed as part of the loan? If so, you’ll 

pay additional interest and points, further 

increasing the total cost of the loan. How 

much lower would your monthly loan 

payment be without the credit insurance? 

Will the insurance cover the length of your 

loan and the full loan amount? Before you 

decide to buy voluntary credit insurance from 

a lender, think about whether you really need 

the insurance and check with other insurance 

providers about their rates.

You’ll also want to ask each lender to provide, as 

soon as possible, a written Good Faith Estimate 

that lists all charges and fees you must pay at 

closing. Ask for a Truth in Lending Disclosure, 

too. It states the monthly payment, the APR and 

other loan terms. Although lenders are not always 

required to provide these estimates, they’re very 

helpful because they make it easier to compare 

terms from different lenders.

2. After Choosing a Lender

• Negotiate. It never hurts to ask if the lender 

will lower the APR, take out a charge you 

don’t want to pay, or remove a loan term that 

you don’t like.
Facts for Consumers

• Ask the lender for a blank copy of the 

form(s) you will sign at closing. While 

they don’t have to give you blank forms, 

most legitimate lenders will. Take the forms 

home and review them with someone you 

trust. Ask the lender about items you don’t 

understand.

• Ask the lender to give you copies of the 

actual documents that you’ll be asked to 

sign as soon as possible. While a lender may 

not be required to give you all of the actual 

filled-in documents before closing, it doesn’t 

hurt to ask.

• Be sure you can afford the loan. Figure out 

whether your monthly income is enough to 

cover each monthly payment, in addition to 

your other monthly bills and expenses. 

If it isn’t, you could lose your home — and 

your equity — through foreclosure or a 

forced sale.

• If you are refinancing a first mortgage, 

ask about escrow services. Ask if the 

loan’s monthly payment includes an escrow 

amount for property taxes and homeowner’s 

insurance. If not, be sure to budget for those 

amounts, too.

3. At Closing

• Before you sign anything, ask for an 

explanation of any dollar amount, term or 

condition that you don’t understand.

• Ask if any of the loan terms you were 

promised before closing have changed. 

Don’t sign a loan agreement if the terms 

differ from what you understood them to be. 

For example, a lender should not promise 

a specific APR and then — without good 

reason — increase it at closing. If the terms 

are different, negotiate for what you were 

promised. If you can’t get it, be prepared to 

walk away and take your business elsewhere.

• Before leaving the lender, make sure you 

get a copy of the documents you signed. 

They contain important information about 

your rights and obligations.

• Don’t initial or sign anything saying you’re 

buying voluntary credit insurance unless you 

really want to buy it.

4. After Closing

Having second thoughts about the loan? The 

Truth in Lending Act gives most home equity 

borrowers at least three business days after 

closing to cancel the deal. This is known as your 

right of “rescission.” In some situations (ask 

your attorney), you may have up to three years to 

cancel. To rescind, you must notify the creditor in 

writing. Make sure you document your rescission. 

Send your letter by certified mail, and request a 

return receipt. That will allow you to document 

what the creditor received and when. Keep copies 

of your correspondence and any enclosures. After 

you rescind, the lender has 20 days to return the 

money or property you paid to anyone as part 

of the credit transaction and release any security 

interest in your home. Remember that you must 

then offer to return the creditor’s money or 

property, which may mean getting a new loan 

from another lender.

Where to Complain

If you think your lender has violated the law, you 

may wish to contact the lender or loan servicer 

to register your concerns. At the same time, 

you may want to contact an attorney, your state 

Attorney General’s office or banking regulatory 

agency, or the Federal Trade Commission. 

The FTC works for the consumer to prevent 

fraudulent, deceptive, and unfair business 

practices in the marketplace and to provide 

information to help consumers spot, stop, and 

avoid them. To file a complaint or to get free 
Facts for Consumers

January 2004

Federal Trade Commission

Bureau of Consumer Protection

Division of Consumer and Business Education

Produced in cooperation with AARP.

information on consumer issues, visit www.ftc.

gov or call toll-free, 1-877-FTC-HELP (1-877-

382-4357); TTY: 1-866-653-4261. The FTC 

enters Internet, telemarketing, identity theft, and 

other fraud-related complaints into Consumer 

Sentinel, a secure online database available to 

hundreds of civil and criminal law enforcement 

agencies in the U.S. and abroad.

For More Information

The American Association of Retired Persons has 

information about predatory lending. You can 

access information by phone: toll-free 

1-800-424-3410; by mail: AARP, 601 E Street, 

NW, Washington, DC 20049; or on the Web: 

www.aarp.org/consumerprotect-homeloans.

High-Rate, High-Fee Loans

The Home Ownership and Equity Protection Act (HOEPA) may give you additional rights if your 

loan is a home equity loan, second mortgage or refinance secured by your principal residence and if:

• the loan’s APR exceeds by more than 8 percent the rate on a Treasury note of comparable 

maturity on a first mortgage, or the loan’s APR exceeds by more than 10 percent the rate on a 

Treasury note of comparable maturity on a second mortgage.

• the total fees and points at or before closing exceed $499 or 8 percent of the total loan amount, 

whichever is larger. (The $499 figure is for 2004 and is adjusted annually.) Credit insurance 

premiums written in connection with the loan count as fees for this purpose.

If HOEPA applies:

• A lender may not engage in a pattern or practice of lending based on home equity without regard 

to the borrower’s ability to repay the loan.

• You must get certain disclosures from the lender at least three business days before closing.

• Your lender cannot make a direct payment to a home improvement contractor.

• Certain loan terms are illegal — such as most prepayment penalties and increased interest rates 

at default.

• In most situations, your loan cannot have a balloon payment due in less than five years.

• Due-on-demand clauses may not be used unless the consumer defaults.

• A lender that has made a HOEPA loan to a borrower generally may not refinance that loan into 

another HOEPA loan within the first year.

• Your lender may not call a one-time loan a line of credit.

A high-rate or high-fee loan might be right for you, but be aware that it has risks. It is an extremely 

expensive way to borrow money. You could lose your home if you can’t make the payments.