Could a simple mortgage loan do significant damage to your financial situation? It could if you’re the victim of predatory lending tactics. That phrase is generally used to describe loans structured in a way that makes them more costly or difficult to pay down than other borrowings. People who are saddled with these loans could damage their credit rating or even lose their homes. Predatory loans are often marketed to people who are older, have lower incomes or bad credit, or who may not be familiar with financial terms and practices. The Pennsylvania Institute of Certified Public Accountants (PICPA) advises to watch out for these warning signs.
Warning Sign #1: High Initial Fees
If you’re asked to hand over hundreds of dollars up front for an application fee or other charges, it’s a good idea to step back and shop around to see if you can find a better deal. Ask for a disclosure of all fees associated with the mortgage, including fees called points. Even if you’re getting a subprime loan designed for people with poor credit or other financial issues, aim to pay no more than two points on your mortgage. Also, be sure to get a thorough understanding of all fees by questioning anything you’re unsure of.
Warning Sign #2: Exorbitant Interest Rates
Interest rates vary based on the lender, loan type, and loan terms, but steep interest rates are another red flag. It’s true that you’ll likely have to pay a higher interest rate on your mortgage if you have a low credit rating, but know what interest rate is reasonable for your situation. Get a reality check by consulting a local CPA. Then shop around with lenders to make sure you’re getting the best rate possible.
Warning Sign #3: Low, Low Payments
Lenders may emphasize low monthly payments, but if the deal seems too good to be true, make sure you read the fine print. A loan may have small monthly payments because you’re only paying interest on the debt or because you’ll be required to make large lump-sum payments later in the loan term. In either case, the deal is likely to cost you more money and inconvenience in the end. Even worse, it could jeopardize your home if the lump sum payments can’t be met. Low monthly payments also mean the loan will take extra time to pay off, saddling you with debt for a longer period of time. Often, low initial payments turn out to be no bargain at all.
Warning Sign #4: Prepayment Penalties
There are many reasons why you may want to pay off your mortgage before the loan term is over. You may want to refinance to get a better rate, or you may choose to sell your house for a number of reasons. That’s why it’s important to ensure that there isn’t a penalty if you pay off your loan early.
Contact Your CPA
Whether you’re worried about getting a good deal on a mortgage, or just planning for your financial future, your local CPA can help. Turn to him or her with all your financial concerns. To find a CPA in your area or for more financial tips, visit www.picpa.org/moneyandlife.