High Cost Home Loans: Your Legal Protections
Thinking about borrowing money? Because of the risks involved, think twice before using the equity in your home to secure the loan. Sometimes there are financial advantages to using your home's equity when you borrow, but most advantages disappear if you have to pay high interest rates and fees on the loan. Home equity loans with high rates, points, or fees are especially risky because you could lose your home if you can't make the monthly payments!
You do have some legal protections when you take a loan secured by your home if the loan has a high interest rate or high fees. That's true whether you have a home equity loan, refinancing loan, or second mortgage. AARP has a special interest in this issue. Many of these loans are aimed at older or lower-income homeowners who may have a lot of equity in their homes and may need money to pay for medical expenses or home repairs.
To control the practices used by lenders that charge very high fees and interest rates on home loans, Congress passed the Home Ownership and Equity Protection Act (HOEPA). Under this law, get extra protections if you are sold a HOEPA loan – a loan with "high" interest rates or "high" fees. You have a high interest rate loan if the loan’s annual percentage rate (APR)is 8 points higher than the rate on a Treasury bill for the same length of time. At today's rates, a 10-year loan would be considered "high rate" if the rate is above about 13%. Fees are defined as total fees and points you have to pay up front. They are considered "high" if they equal more than $480 (2002 figure) or 8 percent of the total loan amount, whichever is higher.
Your legal rights if you have a HOEPA loan:
- The lender must give you certain disclosures at least three business days before closing on the loan. For example, you must get a written notice that you could lose your home if you do not make the payments.
- The lender cannot directly pay a home improvement contractor. The check has to be made to you.
- Your loan cannot have a balloon payment (a large final payment) due in less than five years
Even if you do not have a HOEPA loan, you can protect yourself when borrowing money on your home equity by talking to your attorney, financial advisor, or someone else you trust before making any decision. If you have second thoughts after taking out a loan, contact an attorney immediately. If the lender violates HOEPA or any Truth in Lending laws, you have a right to cancel the loan. But you must act quickly. You lose many of your rights if you do not act within three business days.
AARP Resources
Avoid Predatory Lenders
Some practices fraudulent lenders use and advice on what to look
for in choosing a lender.
Home Equity Loan Terms: A Glossary
Understand what the various words and terms mean.
Understanding Reverse Mortgages
The information you need to decide if a reverse mortgage is a
good choice for you.
Additional Resources
High
Rate, High Fee Loans
Information about HOEPA loans and how to spot unscrupulous
lenders.
To file a complaint about a lender, contact the FTC Consumer Response Center Web site
Putting
Your Home on the Loan Line is Risky Business
Useful information on using your home equity as security to
borrow money. The Web site also discusses other options for
borrowing.
To file a complaint about a bank, you can also contact the Federal Reserve Board.
Books
Find this book online at Barnes & Noble.com.
How to Get the Best Home Loan
W. Frazier Bell, Wiley, John & Sons, Incorporated, May
2001
An experienced mortgage banker offers step by step advice on
getting a mortgage and discusses credit reports and different
loan types.
