|
If you have a rate that can change, you have to ask some questions. "You want to know what is the worst-case scenario, not best," says Garcia. "What's the worst this can get? Will that be OK?" Realize that a changing rate makes the loan a much riskier proposition for you. In a recent study of subprime mortgage refinance loans, ARM features boosted the chances of foreclosure by 49 percent, Stegman says.
Balloon payment
"The ideal is: Don't have any balloon payments," says John Taylor, president and CEO of National Community Reinvestment Coalition, a trade association of community groups. The worst scenario: The balloon is due early in the loan. "It makes a huge amount of money due right away, and most people in the subprime market really can't afford to do that. So for a lot of people, they end up losing everything."
In subprime mortgage refinance loans, borrowers with a balloon payment have a 46 percent greater chance of foreclosure, says Stegman.
Too-large loan
More is not always better. So raise the red flag if a lender is trying to talk you into a larger loan. Two red flags if your home is the collateral. If you have to borrow, take the least amount for the shortest time period with the lowest APR.
Excessive fees
"Some fees are truly legitimate," says Garcia. "Some are backdoor fees that don't appear in the disclosure." What you want to watch out for is excessive or hidden fees. Add everything up yourself. The sum of the terms you shopped should equal what's in the loan documents. If it doesn't, you need to ask some questions.
"The title insurance policy should be something competitive," says Taylor. And if you're refinancing, you should get a refinance rate on the policy -- often half the cost, he says. "In terms of points, you shouldn't pay more than 1 to 2 points even in subprime situations. You can find competitive subprimers who will make you loans at those rates."
Useless services
Additional services you don't want or need. Some loans are bundled with insurance policies to pick up payments or pay off the loan if you die or become disabled. Assuming you want the coverage (and can't get it cheaper from your insurance company), the problem is that many times you pay for the entire policy upfront and it's rolled into the loan with interest, Taylor says. So if you refinance that 30-year mortgage after five years, you'll have paid for 25 years of insurance that you won't use and can't recoup. If you want the feature, look for a pay-as-you-go version.
Credit card that taps your home equity
You don't want to squander home equity on a thousand little everyday purchases, says Garcia. "That's a real scary prospect."
High interest rate
The difference between prime and subprime rates will
vary with the length and type of loan. With a mortgage,
once you get 5 percent to 6 percent above prime, "It's
time for the customer to look around and see if they
can do better," says Allen Fishbein, director of housing
and credit policy for Consumer Federation of America.
|
