What Are Predatory Mortgage Loans?
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by: marciafreeman
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Are you having financial trouble, and need to refinance with a new mortgage loan fast? Choose your lender carefully. The market is full of predatory lenders who are eager to sell you a mortgage with abusive rates that will make your financial situation worse, not better.
What are the initial signs of a predatory loan?
Predatory mortgage loans typically have interest rates that are high for the market. Lenders may suggest offsetting these fees by frequent refinancing ("flipping") of loans, which is another bad sign. A third sign of a predatory loan is high pressure tactics. Lenders are eager, even hungry, for new business (one expert calls these loans "loans seeking consumers"), and they are aggressive in seeking you out and convincing you to sign. Predatory lenders, unlike legitimate lenders, solicit by telemarketing or go door to door as well as using junk mail campaigns.
What do the terms of predatory loans look like?
Predatory lenders offer mortgage loans that not only have high interest rates, they come with an array of unethical fees and riders. An example of some of these unethical fees are:
• Prepayment penalties. Predatory lenders want to force borrowers to stay with them for as long as possible, so they penalize borrowers for repaying the mortgage loan before the end of the term. While nonpredatory loans very occasionally have prepayment penalties for paying off the loan within one to three years, a term that is unlikely to inconvenience homeowners, predatory loans frequently have penalties for paying off the loan even after three years. Turn down any loan you are offered that has a prepayment penalty for a term shorter than three years, and take a long, hard look at any loan that has a prepayment penalty for any length of time. This penalty is rare on loans offered by legitimate lenders, so its existence strongly suggests that the loan you are evaluating is predatory.
• Kickbacks, or "yield spread premiums." When a mortgage broker charms a borrower into signing for a mortgage with an interest rate that is much higher than the borrower would be able to get from an honest broker, the brokers reward is a sum called the yield spread premium. This kickback is a strong incentive for the broker to talk you into a high interest rate. If you are offered a mortgage loan with a yield spread premium, look elsewhere. Good loans never include this fee.
• Routine fees that have been increased outrageously. Calculate how much extra you will pay in fees attached to your mortgage loan. If they are under 1% of the loan amount, they are normal. Fees above 1% are the sign of a dishonest loan; some predatory loans charge above 5%.
Because of the credit crunch, it is easier than before to avoid dishonest mortgage loans. Lenders, even unscrupulous lenders, simply dont have as much credit available to take on potentially bad debt. However, the crunch has also made homeowners desperate, and desperation equals vulnerability. Even if you are having financial problems, be critical of any offer you get. It may land you in even greater trouble. Take your time, go over all the terms in detail, and avoid any lenders whose high pressure tactics make you suspect that they need you more than you need them.
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