Is your current loan or the one being pitched to you predatory? Consider some of these warning signs highlighted by consumer advocates and lending experts.
|1. You’re being quoted an interest rate of more than 10 percent to 11 percent even though you have good credit.||Although borrowers with foreclosures, several late mortgage payments or other problems in their past can end up paying as much as 14 percent or more on home equity loans and first mortgages, low-risk consumers shouldn’t be stuck with an interest rate that’s much higher than the going market rate.|
|2. The lender wants you to pay several points but isn’t reducing the interest rate much, if at all.||Lisa Donner of the Association of Community Organizations for Reform Now says a call came in from the activist group’s Chicago office just before she was interviewed. Staffers there were dealing with a borrower who had been sold a loan with 5 points — but an interest rate of 13 percent. “They weren’t buying down an interest rate to 13 percent,” she says. “That was just another way of sticking it to them.”|
|3. Total fees are more than 5 percent of the loan amount.||Yes, closing costs vary by location and borrowers in high-cost states pay more to get mortgages. But $5,910 in fees on a $60,000 loan — something the National Training and Information Center in Chicago saw in one recent transaction — should be looked upon as excessive.|
|4. The loan has a long-dated prepayment penalty or an especially expensive one.||Borrowers can sometimes lower their rates by accepting prepayment penalties. But subprime borrowers who need that kind of help shouldn’t accept a five-year penalty when they can re-establish their credit and qualify for a prime loan with as little as 24 months’ or 36 months’ worth of timely payments. As for the size of the penalty, something like 6 months’ interest should be considered excessive.|
|5. The closing documents refer to an adjustable rate mortgage when the good faith estimate was for a fixed rate one.||Lenders sometimes pull a bait-and-switch on unsuspecting borrowers between the initial consultation and closing. Don’t settle for a loan that’s not what you wanted.|
|6. There’s a significant balloon payment attached to the loan.||Not all balloon loans are bad, as long as borrowers know they’ll either have to refinance at the end of the loan term or come up with the balloon payment in cash. But unscrupulous lenders will trick people who don’t have a lot of money lying around into getting these mortgages. When their balloon payment comes due, these borrowers have to refinance, thereby generating more fee income for the lender.|
|7. The proposed loan will raise your overall debt-to-income ratio to 45 percent or more.||Someone with pretax monthly income of $2,000 shouldn’t be paying more than $800 or, in extreme cases, $1,000 a month toward credit cards, auto loans and a mortgage. A lender who tells you not to worry about a 50 percent debt-to-gross income ratio should be looked upon with caution.|
Sources: National Training and Information Center, Chicago; Community Reinvestment Association of North Carolina, Raleigh, N.C.; Association of Community Organizations for Reform Now, Brooklyn, N.Y.