A married senior couple seeing a home equity scam artist. The men have reached and agreement and the wife looks angry.

Home Equity Loan Scams

Homeowners beware. These days home equity loan scam artists are lurking around every corner. They’re hungry, they’re determined, and they’re coming after your equity.

A married senior couple seeing a counselor or salesman. The men have reached and agreement and the wife looks angry.

Unscrupulous loan peddlers are known as predatory lenders because of their uncanny resemblance to vultures. These loans encourage people to consolidate their debts and suggest this will prevent them from ever overspending and maxing out their credit cards again.

Asset-based lending

Predatory lenders work hard to make loans based on the amount of home equity a borrower has rather than considering the borrower’s ability to repay the loan.

Red Flag: You’re assured that it doesn’t matter what your income is because the value is in your home equity.

Deceptive marketing

Victims of predatory lending frequently describe being subjected to a flood of phone calls and letters from brokers and lenders, encouraging them to take out a home equity loan.

Red Flag: Lenders who engage in high-pressure tactics, telemarketing, cold calling, and deceptive advertising campaigns.

Excessive fees

Predatory lenders routinely charge borrowers fees totaling 15 to 20 percent of the loan amount. Fees alone can have a ruinous impact on a homeowner’s equity. But add them to prepayment penalties, and you’re locked into a high-rate, financially disastrous loan.

Red Flag: You inquire about fees but can’t get the facts. They insist there are no “up-front” fees.

Equity stripping

You need money. You don’t have enough coming in each month to cover your expenses. You have equity in your home. A lender tells you that you could get a loan. This is a big shock because you know you will have difficulty keeping up with the payments. The lender encourages you to “pad” your income on your loan application to help get the loan approved.

Equity stripping is particularly dangerous for people who find themselves in financial trouble. Scammers target people facing foreclosure or other financial hardships and make false promises of relief. Beware of anyone who pops up at what seems like the perfect time promising to let you cash in the equity you’ve built up without any consequences. Falling for this scam could result in losing your home and all the equity you’ve accumulated.

Red Flag: Any suggestion that you can qualify for a loan when you know the truth is you cannot reasonably make the payments.

Balloon payment

You’ve fallen behind in your mortgage payments. Another lender offers to save the day by refinancing your mortgage and lowering your monthly payments. But beware. The payments may be lower because the lender offers a loan on which you repay only monthly interest. And then in three or five years, WHAM! You discover you owe a huge sum, known as a balloon payment. That could wipe you out if you don’t have thousands of dollars set aside in anticipation of this.

Red Flag: Unrealistically low payments.

Loan churning

Senior homeowners who are asset-rich but cash-poor are prime targets for this scam. A mortgage company contacts you offering to refinance your loan and throw in some extra cash. Then in another year two, here they come, “suggesting” it’s time to refinance again, pulling out more cash. And again, and again. It’s called churning, and it’s not good.  The problem is that fees and interest rates increase exponentially each time you refinance.

Red Flag: Lenders contacting you and suggesting that a loan is a way to get your equity to start “working” for you.

Not all home equity lenders are predatory

The best way to protect yourself against unscrupulous lenders is to be keenly aware of their tactics and always on the lookout for red flags. If you need an explanation, talk to someone you can trust who has nothing to gain or to lose by the decision you make. Be careful how often you refinance your mortgage. Talk to a HUD-approved housing counselor if you have questions or concerns about any mortgage loan transaction.

Get a second option, another quote, and above all, consider all the costs of financing and repayment before you agree to a loan.

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2 replies
  1. Anita Esser says:

    Mary, I have a Reverse Mortgage, that we took out many years ago, I didn’t know we were supposed to be paying it back, a lady said “Oh you never have to pay it” So we believed her, and now the bank owes 1/3 of our house. Help!!!! Why didn’t anybody ever tell us. This is robbery. What can we do now?

    Reply
    • Mary Hunt says:

      I am not an expert on Reverse Mortgages, so verify everything I have to say. What you believed is only partially true. You received a portion of your home’s equity when you took out this mortgage. It is a loan, and you are not required to make monthly payments on it as long as you live in the home. That does not mean that loan does not have to be repaid or that it is not accruing interest. Every month the payment you don’t make and the interest owing is added to the principal balance, to be paid in full upon your death(s) when your heirs or the mortgage holder sell the property. After all these years, undoubtedly, you owe a great deal more than you borrowed, and should you live long enough the mortgage company will, in essence, own the property in full. That’s the downside of a reverse mortgage and the reason it should be an option of last resort. This type of mortgage (available only to seniors who own their homes outright) is allowing you to live in your home until death and spend your home equity without having to make mortgage payments. Under the terms of a reverse mortgage, you cannot be foreclosed on or thrown out regardless of what happens to its value, provided you continue to pay the property taxes and upkeep. But the interest and fees can be horrendous—all of which you agreed upon, and which the mortgage lender will recover upon your death(s) when the house is sold for whatever it is worth at that time—or if you vacate the property before.

      I suggest you read Reverse Mortgages at the FTC website. If anything you read there does not jibe with what you signed, what you were told, and what you understand, gather up all the paperwork you signed and make an appointment with an attorney specializing in real estate and/or contract law.

      Hope that helps!

      Reply

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