Older Americans have often built up one solid form of financial security -- equity in their homes. But they are often living on fixed incomes and unexpected expenses come up, such as costly home repairs, property taxes and medical care.
This makes older homeowners a target for predatory lenders, who market home equity loans using deceptive and intimidating tactics that include high fees, hidden payments, and other difficult terms that could lead to the loss of property through foreclosure.
Here are some of the steps you can take to avoid being the victim of a predatory lender:
- Use caution. Be suspicious of "bargain loans," offers that are "good for a very short time," and anyone who makes the first contact. Most reputable finance companies don't solicit business.
- Never act quickly. Avoid lenders who take applications over the phone, promise guaranteed low-interest loans, or offer next-day approval for money paid in advance.
- Watch out for home improvement scams. Home improvement contractors often refer older people to predatory lenders. The contractors, who are working with the mortgage companies on commission, convince homeowners that repairs are needed and that easy financing can be arranged. Even worse, the contractors often don't finish, or even start, the work.
- Shop around. Contact local financial institutions to see if you are eligible for a loan from a local bank, credit union, or mortgage company. Compare total costs as well as interest rates and be clear about the points and fees. Check with the Better Business Bureau.
- Avoid balloon payments. It may sound attractive to have low monthly payments and a big payment only at the end of the loan period. But remember that the borrower is obliged to make that payment or the lender can foreclose. Some lenders may promise to help refinance that final payment, but this may be simply a scam to get higher fees and closing costs.
- Read carefully. Borrowers should never sign anything they don't fully understand. Go elsewhere if the lender won't change the contract or explain to your satisfaction. And never sign any document with blank spaces.
- Think about a reverse mortgage. A reverse mortgage is an alternative to a home equity loan. These mortgages provide money that doesn't have to be repaid until the borrower moves, sells the house or dies. The money can be taken as a lump sum, monthly payments or a combination. But shop carefully. Illegal and unethical lending practices also exist with reverse mortgages.
- Do not buy credit insurance. This insurance is extremely profitable for the lender, but provides little or no benefit to the borrower. The insurance is financed over the life of the loan, so premiums are expensive. The same amount of insurance can generally be purchased elsewhere for much less.
Take Action. If you or someone you know has been victimized, inform the appropriate regulatory and law enforcement agencies, such as the state Attorney General's Office and the local police department.
Eighty percent of Americans age 65 and older own their homes. About 68 percent have paid off their mortgages. The median value of homes owned by older persons is $150,000 (according to the latest statistics available).
- Source: Administration on Aging