Do you remember the story of the lady whose mortgage ate her house? She borrowed $30,000 and ended up owing her lender an astounding $127,000 just five years later. The payout represented 55 percent of the entire sales price of her home. Loan nightmares like hers are spurring private and governmental efforts nationwide this year to educate homebuyers and owners to recognize the telltale signs of toxic or predatory mortgage deals. The efforts by leading home loan industry organizations including Freddie Mac, the Mortgage Bankers Association of America and Fannie Mae are particularly timely in the midst of the wild refinance boom now underway.
Ask yourself: Do you know the dirty tricks used by purveyors of anti-consumer, harmful home loans? Are you potentially vulnerable to a mortgage rip-off? Please do not reflexively assume you're immune because you're middle-income or a professional.
Here's a quick primer on how to avoid the bad guys out there in the mortgage jungle. It is based in part on discussions with and materials provided by mortgage bankers and Freddie Mac.
- Know thyself, know thy credit. Do you know how you stack up as a prospective borrower? That's a critical starting question because a "good" deal for someone with damaged credit may be a terrible deal for someone with excellent credit.
Before shopping for rates on the Web or by phone, get a copy of your current credit report. If you can convince a loan officer to tell you your credit score, find that out, too. If you've got a FICO (Fair, Isaac & Co.) score above 700, you're golden; you probably qualify for the lowest rates and fees in the market, and can shop accordingly.
If your credit report reveals multiple late payments and your score is in the low 600s or into the 500s, you are officially "subprime." You're going to be quoted rates and fees that are higher than those quoted to people with unblemished credit. But by knowing where you stand on the credit totem pole and aggressively shopping for multiple lending sources, you'll develop a sense of just how much extra you should pay.
Keep in mind: There are dozens of subprime home loan companies that want to compete on rates and fees for your business. They play a key role in the home buying field financing people with higher-risk credit profiles who otherwise would be vulnerable to predatory lenders and loan sharks.
- Know the deal. The lady who signed up for the mortgage that ate her house made two crucial mistakes: She talked to only one lender, and did not read her loan documents when they were shown to her.
But the devils of abusive loans often are alive and visible in the fine print. That's where many of the most common tricks of the predatory lending trade can be found.
- Negative amortization. Another way to keep monthly payments low is to pay off no principal and less than the correct amount of interest every month. At the end of a few years of this, you'll owe thousands more than when you started. Don't shop solely on the basis of monthly payment amounts, like auto shoppers often do. Demand in advance to see an amortization schedule showing how much you'll owe at year 5, year 10, etc.
- High points and padded closing costs. Abusive lenders often are looking for a piece of your home equity, and they get it up front, out of the proceeds of the refinancing. Say you do a "cash out" refi on a $200,000 house, moving the mortgage up from $100,000 to $150,000. Of the roughly $50,000 cash produced by the deal, how much do you actually end up with in your pocket? Look at the documents: If the loan broker is playing equity-stripping games, $10,000 or $15,000 or more could end up in his or her pocket.
Not a good deal and completely avoidable.
Kenneth Harney is a columnist for the Washington Post Writers Group. Jane Bryant Quinn is on vacation. Her column will resume upon her return.
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