Nearly all predatory lending occurs in the “subprime market,” where loans are sold to people with less than ideal credit histories. Subprime loans have played an important role in helping millions of consumers achieve homeownership, but, unfortunately, some lenders abuse their role and take unfair advantage of vulnerable borrowers. Here are some common problems with predatory loans:
- High interest rates and fees: Predatory lenders often charge extremely high interest and fees that are added into the total amount of the loan the borrower must repay. These lenders charge what they can get away with, not a fair amount based on the credit history of the borrower.
- Broken promises & bait and switch: Sometimes hosme buyers are offered a new loan or a refinance of an existing loan that seems to meet all of their needs–only to find that interest rates and fees have changed when they get to the closing table. Agreeing to last-minute changes can cost thousands of dollars and result in a loan they just can’t afford.
- Loans that start low and go high: Adjustable rate loans are popular in today’s market, but many that seem affordable are likely to have steep cost increases in the future. Avoid “payment shock” by considering whether you can pay for the loan both now and in the future.
- Loan “flipping”: Too many homeowners are persuaded to refinance their mortgage, sometimes repeatedly, when there is no real benefit. Even when a family receives some cash from a refinance, the gains should be weighed against the costs of excessive fees and a higher loan amount.
- Steering: Some families who receive subprime loans could qualify for a much more affordable home loan. Predatory lenders use aggressive sales tactics to steer families into unnecessarily expensive loan products.
TOMORROW: Know the right questions to ask when shopping for a low-cost loan.
Melissa DelGaudio is a REALTOR and an expert in Real Estate Sales in Annapolis, Anne Arundel County and the Chesapeake Bay Region of Maryland.
