FTC FACTSfor Consumers

REAL ESTATE

1-877-FTC-HELP

FEDERAL TRADE COMMISSION FOR THE CONSUMER

www.ftc.gov

I

Need a Loan?

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.

Think Twice About Using $

Your Home as Collateral

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.
Facts for Consumers

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. 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

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Facts for Consumers

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.

• 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,
January 2004

F C EDERAL RADE OMMISSION T FTC OR HE ONSUMER

1-877-FTC-HELP www.ftc.gov

Facts for Consumers

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.

Produced in cooperation with AARP

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 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.