Mortgage Refinancing: The Danger Signs of Predatory Lending

By Gabriel Traverso
Home Worth Columnist

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Today's real estate market has been upset by widely publicized troubles in the subprime mortgage market. Some members of Congress blame the Fed, but the Fed puts the blame on predatory lending practices. Most lenders are reputable and honest--they want the predators out of business, and they want you to know how to recognize these bad guys of the mortgage industry.

Mortgage Refinance or Home Equity Loan: Pick an Honest Lender

Federal Reserve Chairman Bernanke addressed Congress recently on the troubles the housing market is facing. In his remarks he condemned predatory lending practices and indicated that stricter regulations were "worth looking at". However, the law governing the mortgage industry is no substitute for vigilance on the part of the borrower--just like the FBI is no substitute for locking your doors at night.

The Signs of Predatory Lending

These tips come from the Los Angeles City Attorney's website and warn homeowners of the signs of home equity loan scams:

• You want a home equity loan but can't quite afford the additional monthly payments. The lender suggests you "pad" your income on the application. In the end you could have mortgage payments that exceed your ability to pay.
• You're interested in refinancing and a lender offers you lower payments than your current mortgage. Look carefully at the terms: you might be looking at an interest-only or option ARM mortgage and your payments could escalate dramatically. For some homeowners this can lead to foreclosure.
• You decided to refinance your loan. After a few months of making payments the lender contacts you again and offers another attractive refinance option. This practice is often referred to as "loan flipping." Each time you refinance the lender charges you fees and points.

Consider Your Home Loan Carefully

Home values are no longer rising as they were a few years ago and in some areas prices are even falling. This highlights how important it is for homeowners to treat their equity wisely and be aware of the warning signs of predatory lending. Before you refinance or get a home equity loan read the terms of the loan carefully and make sure it will work for you. If you have any doubts make sure to ask plenty of questions and don't decide until all your doubts are resolved.

Source
Washington Post: Bernanke Open to Limiting Lending

About the Author
Gabriel Traverso is a freelance writer, independent musician and artist. He resides in Reno, Nevada.