Refinancing? Home Equity Loan? Borrower Beware!

Dear Readers,
You may have read lately in the national press about unscrupulous practices by some lenders for refinance or home equity loans. These types of loans are typically solicited by a lender via mail or phone, and are almost never subject to third-party scrutiny (such as a Realtor) because there is no real estate transaction involved. Thus a perfect opportunity is created to legally bilk millions of dollars from an unsuspecting public, in the form of "broker's fees" and other hidden charges, often accompanied by preposterous interest rates and draconian pre-payment penalties.

Like so many of you, I've been aware of the problem-although it has always been easy to think of these abuses as occurring far away, in more lawless places such as Florida! But the most recent, and the worst, story I've heard is all too local; it comes from clients I worked with several years ago:

Needing a larger home for their growing family, they decided to borrow about $10,000 last fall to make needed improvements to their current home, with plans to sell this year. (Good so far, but I wish they had called me at this point.) A seemingly well-timed phone solicitation from an unnamed suburban mortgage broker eventually led them into an utterly unnecessary refinance of their first mortgage, far above the market rate, with an extra 4% broker's fee nestled in the well-padded closing costs. And it gets worse: the outrageous closing costs, plus the smaller debt payoffs required by this lender in order to make the loan, left only $1000 proceeds for the borrowers!

The lender's solution? An accompanying home equity loan (their specialty) at 13%. The mortgage also contains a pre-payment penalty (almost unheard of these past 20 years), making it terribly expensive for my clients to sell their house at all.

Space doesn't permit a full retelling of this cautionary tale-suffice it to say the lawyers are on the case, and we wish them well. Of course, most mortgage brokers are ethical, and devoted to bettering the lot of their clients-but how do we sort them out, in the daily flood of solicitations we receive from reputable-sounding companies? My suggestion: don't try. Refinancing or equity loans don't have to be do-it-yourself projects. Your Realtor knows good and honest loan people; she (or he) works with them every day, from the largest banks to the small independent mortgage brokers. For refinance, start with the mortgage banker who obtained your first mortgage. For equity loans, start with the institution that handles your checking and savings accounts. Equity loans shouldn't cost more than the price of an appraisal. Talk to more than one lender, crunch the numbers carefully, and don't be afraid to ask "dumb" questions. Good luck!