If you are like most homeowners,
you probably have a first mortgage loan on your home. Typically,
such loans are for 25 to 30 years, with the monthly payments
adjusted so that the loan is paid in full at the end of the
term.
As you make monthly mortgage payments and the value of the home
increases, your interest in the property (called
"equity") grows. After a while, some homeowners may
wish to borrow against the equity in their home to get cash, to
make home improvements, to educate their children, or to
consolidate personal debts. Because such loans are in addition to
the first mortgage on the home, they are commonly called
"second mortgage" loans.
Second mortgage loans are different from first mortgages in
several ways. They often carry a higher interest rate, and they
usually are for a shorter time, 15 years or less. In addition,
they may require a large single payment at the end of the term,
commonly known as a balloon payment.
Traditionally, second mortgage loans are offered with a fixed
loan amount and a predetermined repayment schedule. Some lenders
now offer lines of credit that allow you to obtain cash advances
with a credit card or to write checks up to a certain credit
limit. These often are called "home equity lines"
because the equity in your home is collateral for the amount of
credit you request. As you pay off the outstanding balance, you
can reuse the line of credit during the loan period.
This brochure provides answers to some common questions people
ask when they begin shopping for a second mortgage or home equity
loan. It discusses choosing a lender, the meaning of some
mortgage terms, costs, disclosure documents, and contacts for
resolving problems.
When you are looking for a lender,
shop around and make comparisons. Interest rates, repayment
terms, and origination fees may vary substantially. Ask your
local banks, savings and loans, credit unions, or finance
companies about their loan terms. Although you will want to
select the lender who offers you terms most suited to your needs,
be sure to ask and compare the annual percentage rates (APR)
because they will give you the total cost of the loan, including
financing charges.
If you have not done business with the lender before, or if the
lender is unfamiliar to you, you may wish to ask your local
Better Business Bureau or consumer protection office if they have
any complaints against the lender.
Some second mortgage loans may
extend for as long as 15 or 20 years; others may require
repayment in one year. You will need to discuss the repayment
terms with the lenders and select one who offers terms that best
suit your needs. For example, if you need to borrow $20,000 to
make repairs on your home, you may not want a loan that requires
you to repay the entire amount in one or two years because the
monthly payments may be too high.
If you have a fixed-rate loan, the
interest rate is set for the life of the loan. However, many
lenders offer variable rate mortgages, also known as adjustable
rate mortgages or ARM's. These provide for periodic
interest-rate adjustments. If your loan contract allows the
lender to adjust or change the interest rate, be sure you
understand when the lender has the right to change the interest
rate, whether there are any limits on how much the interest or
payments can change, and how often the lender can change the
rate. You also should know what basis the lender will use to
determine a new rate of interest.
Be sure you understand how much
your monthly payments will be and what they cover. Your lender
should be able to give you this information in advance. With some
loans, you will be required to make monthly payments on the
principal and interest. With other loans, you may be required to
pay interest only on the borrowed amount; in these loans, your
monthly payments will not reduce the principal amount of the
loan. With such a loan, you will be required to pay back the
entire borrowed amount at the end of the loan period. These loans
are popularly known as "balloon loans." If your loan
has a balloon payment, you should consider how you will arrange
to repay the entire amount when it becomes due.
On "home equity lines," the lender does not have to
give you the exact amount of the monthly payment, but must
explain how it is figured. This is because the borrowed amount
will vary and your outstanding balance will change if you use the
line of credit. However, if your monthly payment term is 5% of
the outstanding balance and your outstanding balance is $5,000,
your minimum monthly payments would be $250.
Many companies will charge a fee
for lending you money. The fee is usually a percentage of the
loan and is sometimes referred to as "points." One
point is equal to one percent of the amount you borrow. For
example, if you were to borrow $10,000 with a fee of eight
points, you would pay $800 in "points." The number of
points lenders charge varies, so it may be worthwhile to shop
around. If the fee seems too high, you may be able to bargain for
or find a lower fee. Be sure to get the amount of the fee in
writing before you take the loan. Many states limit the amount of
fees a lender may charge on a second mortgage loan. You may want
to check with your state's consumer protection office or
banking commissioner to determine whether there is a limit in
your state.
If your loan is primarily for
personal, family, or household purposes, the lender is required
to give you a federal Truth in Lending disclosure form before you
sign the customary loan documents, such as a note or deed of
trust. This Truth in Lending form will tell you the actual cost
of the loan. It includes the annual percentage rate, the finance
charge, and the fees included in the loan. For "home equity
lines," your lender also is required to send you a periodic
statement, usually monthly.
The lender also is required to give you a notice of your right of
rescission. The right of rescission gives you three business days
after signing for the loan and receiving the Truth in Lending Act
disclosures to reconsider whether you want to take the loan. For
additional information about the right of rescission, ask for the
free FTC brochure, Getting a Loan: Your Home as Security, at the
address listed at the end of this brochure.
If your lender makes any promises, such as saying you can
"automatically" get the loan refinanced at the end of
the term, be sure your lender puts these promises in writing. In
this way, you may avoid any future disputes.
If you ever have a problem making
your loan payments, talk to your lender as soon as possible. Some
lenders will work with you to arrange a temporary payment plan.
Also, call the lender if you have any questions about your
loan.
However, if you have problems with your lender, you may want to
contact your state, county, or local consumer protection office.
If they cannot help you, they can refer you to the office that
can.
The Federal Trade Commission is responsible for enforcing laws
such as the Truth in Lending Act, the Equal Credit Opportunity
Act, the Fair Credit Reporting Act, and the Fair Debt Collection
Practices Act. It also provides free brochures explaining these
laws. For these or credit-related publications, such as: Home Equity Credit Lines, Using Ads to Shop for Home Financing, and other valuable loan information,
write to: Public Reference, Federal Trade Commission, Washington,
D.C. 20580.
If you believe your lender may be violating a law that the FTC
administers, you can send complaints or questions to:
Correspondence Branch, Federal Trade Commission, Washington, D.C.
20580. Although the FTC cannot resolve individual consumer
disputes, it can take action if there is evidence of a pattern of
deceptive or unfair practices.
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