Protect Yourself Against Predatory Lending..."The Equity Killer"
A Key To Wealth Building
Predatory Lending is the equity killer. Consumers can lose equity in their homes by being placed in higher rates than they qualify for, by paying junk fees that are financed in the loan, by being placed in bad loan programs, etc. Predatory Lending, simply stated, is the practice of unfair lending. Predatory Lending victimizes hundreds of thousands of families every year. For the past 3 years Fair Community Lending Services has worked to protect consumers against predatory lending through education, access and accountability.
So what is Equity?
Equity is your ownership in the property you own also known as your asset position. A mortgage is your liability. So as shown in Example 1, if your home is worth $300,000 and you owe $200,000 to the bank, the equity remaining in your home is $100,000. Your equity is available for you to turn to cash by either selling your home or refinancing your home.
Value of Home: $300,000
Liability/Amount owed to Bank: $200,000
Equity = Value of Home – Amount owed/Liability: $100,000
If you decide to sell your home you will have to pay off the amount owed to the bank and any remaining money would come to you after you pay the fees to sell your home.
You can also gain access to your equity by refinancing your home. Refinancing your home means you work with a bank or broker to take out a new loan on your home. The existing lender would have to be paid off through the refinance, and you receive a new rate and new program. You will also pay loan fees to the bank or broker to establish the new loan.
How do you gain equity and how does Predatory Lending affect that equity?
Equity is gained two different ways. You gain equity by paying down your loan and through market appreciation. Appreciation happens when the price or value of your home go up. Please see an example of appreciation in Example 2.
You purchase your home in January 2006 for $400,000. After 5 years the value of your home goes up to $600,000. You owe the bank $300,000 so the equity remaining in your home is $300,000.
Equity is also gained through paying principal on the loan. So, if you take out a mortgage that requires you to pay the fully amortized payment, you will pay principal and interest. The principal portion of the payment pays down the loan and the interest is the cost of the loan. As shown in Example 3, the higher your rate the more interest you pay and the longer it takes you to pay down the loan on your home.
Loan Amount: $300,000 Loan Amount: $300,000
Interest Rate: 7% Interest Rate: 9%
Total Payment: $1,995.91 Total Payment: $2,413.87
Total principal paid after 1-year: $3,047.47 Total principal paid after 1-year: $2,049.61
Total interest paid after 1- year: $20,903.45 Total Interest paid after 1-year: 26,916.83
Example 3 shows you that the higher your rate, the longer it can take to pay down your loan and gain equity. You will pay over $6,000 more in interest every year at the higher interest rate loan.
Your first home is the key to your financial security and based on your interest rate, loan program and fees charged for the loan, you can position yourself to maximize on the growth of your equity.
Predatory Lending Facts
9 billion dollars is lost each year to Predatory Lending and minority families, the senior community and single moms are the #1 victims.
In 2005 national banks charged minority families an average of 2-3% more on their home loans than white consumers. On a 300,000 loan 2-3% higher means a payment of $ 500-$700 more each month. That is a loss of over $6,000 in equity each year.
Affluent African Americans have 4 times the chance of being victims of Predatory Lending than low-income white families.
The Hispanic community has 2 times the chance of being victims of Predatory Lending than low-income white families
In 1920 the African American Community owned 15.5 million acres of land. Today they only own 1.1. million acres of land.
"U.S. borrowers lose $9.1 Billion Annually
To Predatory Lending Practices"
Number of Families
Financed Credit Insurance
Exorbitant Up-Front Fees
Sub prime Prepayment Penalties
Excess Interest Charged
Lack Concern for Ability to Pay
Types of Predatory Lending:
Flipping or Churning
Flipping or churning occurs when a lender or broker continually refinances a consumer’s home loan without providing a benefit to the consumer for the new loan. Each time the loan is done, more and more fees are folded into the loan which strips equity from the consumer’s property. Seniors are the number one victims of this type of predatory lending practice. If you are refinancing your home, you need to know your benefit.
Exorbitant (Ridiculously High) Fees
When you refinance or buy a home there are fees associated with the transaction. These fees should be disclosed to you on a good faith estimate. The fees cover items including but not limited to title insurance, escrow, taxes, insurance, processing and loan origination fees.
A fair broker will charge a loan origination fee and a loan processing fee along with third party fees such as escrow and title. Unfair brokers and lenders charge application fees, administration fees, and excess fees that are folded into a consumer’s loan.
Brokers and lenders should get paid for their services however some abuse fees. These fees are deceptively costless to many borrowers because when the borrower “pays” them from the equity of their home, they do not feel the pain of counting out thousands of dollars in cash. The borrower parts with the money later, when the loan is paid off and the equity value of their home is reduced by the amount of fees paid to get into the loan.
Financed Credit Insurance
Loan product paid for by the borrower that repays the lender should the borrower die or become disabled. However, the total premiums for the life of the insurance policy are added to the amount of the loan.
Generally, in the single-premium credit insurance (also known as SPCI), five years worth of premiums are added directly to the loan amount. The borrower then pays interest on this amount for the life of the loan and typically has not even begun reducing the loan’s principal balance by the time the five-year credit life insurance coverage period expires. Consequently, when a borrower moves or refinances out of a Sub prime loan after five years, all of the premiums for the terminated insurance are stripped directly out of the borrower’s home equity.
If you choose to purchase this type of insurance policy get it on your own from an insurance company.
Undisclosed Prepayment Penalties
Hidden or deferred fees can strip significant equity from borrowers. Prepayment penalties are usually equal to six months of interest if the consumer refinances or sells the home before the prepayment penalty expires. If a loan carries a prepayment penalty, the consumer should be informed of the prepayment penalty before signing their loan documents. In addition, the prepayment penalty should not be longer than the rate is fixed for.
Some loans have prepayment penalties because lenders want to ensure that they make a certain amount of interest on a loan before the consumer gets out. Prepayment penalties come standard on sub prime loans or higher risk loans (FICO scores below 620). In certain situations, a program with prepay is okay if the consumer is using the loan as a bridge loan to help them fix their credit. The lenders that have standard prepayment penalties also have options to remove the prepayment penalty by taking a higher rate and/or by paying fees.
So on a $300,000 home loan that is financed at a 7% interest rate, your prepayment penalty to get out of the loan early would be approximately $10,500. If you had the same loan amount and an interest rate of 9%, your prepayment penalty would be approximately $13,500.
Prepayment penalties are usually equal to six months worth of interest if the borrower prepays at any time, for any reason, during the first three to five years of the loan. For a 10% interest rate loan, the penalty would be 5% of the loan balance. On a $150,000 loan, this fee is $7,500, more than the total net wealth built up over a lifetime for the median African American family. It’s estimated that these Sub prime prepayment penalties cost 850,000 families $2.3 billion each year.
Over 50% of families are paying a higher interest rate on their mortgage than they qualify for. The reason is broker and lenders make more money when they charge higher rates.
The higher your rate the more interest you pay the longer it takes for you to pay down your loan.
It is reported that over 63% of minorities who are eligible for conventional loans are placed in Sub-prime programs. Sub prime loans carry higher rates and fees, and many sub prime loans (35 to 50% according to Fannie Mae and Freddie Mac) are being made to borrowers who could have qualified for prime loans.
How to Protect Yourself from Predatory Lending?
1. Understand your credit position and position it before you buy a home
2. Put a budget together before refinancing or purchasing a home so you do not over extend yourself.
3. Ask the broker about your loan program if it is an adjustable ask them what your Margin is, Your Index and The Cap on your loan.
4. Ask for a Good Faith Estimate – this will outline your loan amount, your loan program, the costs of your loan, and your monthly payment.
5. Do not sign any blank paperwork
6. Check to see if your loan officer is licensed with the correct agency
7. Attend seminars and workshops to empower your self
The best way to protect yourself is to contact FCLS today or Apply directly online 24 hours a day. We are here to help you protect your investment.
If it seems too good to be true-most likely it is.
These situations (most cases) can be avoided, if WE READ AND RESEARCH!
This requires patience.
If you're desperate, impatient to be a homeowner-you will become the perfect prey for predators, because you are vulnerable, and susceptible to any snakecharmer that comes along.
People, READ, AND ASK QUESTIONS....READ AND ASK MORE QUESTIONS!
You Better Recognize-Foreclosure, and homes being LEGALLY stolen are an everyday reality, for poor families, single parents, minorities, and senior citizens.