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There are some dishonest lenders out there, willing
to take advantage of your desire for cash and cheat you out of your
equity. Here are common scams:
Equity stripping:
A lender says you can get a home equity loan even though you know
your monthly income isn't enough to keep up with the payments. The
lender encourages you to pad your income on the application so the
loan will be approved. Such a lender has his eyes on your equity.
If you default on the payments, the lender forecloses, takes your
home and strips you of the equity.
Loan flipping
This is where a lender encourages you to refinance your loan
repeatedly. In refinancing, the lender charges high fees. In most
loan-flipping cases, each successive loan is for a higher amount
as fees are rolled into the loan amounts. With each flip of the
loan, you increase your debt. If you get in over your head, you
could lose your home.
Credit insurance packing
You've just agreed to a line of credit home equity loan on terms
that seem affordable. At closing, the lender gives you papers to
sign that include charges for credit insurance or other "benefits"
that you didn't ask for and don't want. The lender hopes you don't
notice and doesn't explain how much will be added to the cost of
the loan.
If you do notice and object, the lender may use scare
tactics, telling you that if you don't want the insurance, the loan
will have to be rewritten, resulting in a delay and even reconsideration
of your application. If you agree to buy the insurance, you end
up paying extra for a product you do not want or need.
Deceptive loan servicing
The loan servicer fails to provide you with accurate or complete
account statements and payoff figures, making it almost impossible
to determine how much you have paid and still owe. Or, after you
get your loan, the servicer starts sending letters saying your payments
are going to be higher than expected. The servicer might tack on
taxes and insurance you had already arranged to pay yourself, late
fees even though your payments have been on time or legal fees you
don't understand.
Amid the confusion, you are paying more than you owe.
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Chapter 4: Watch out!
