Here's a mortgage scam disguised as a good deal. Your dear Great Aunt Martha calls you to crow about her new mortgage -- she cut her payment in HALF! Isn't that wonderful?! Well, maybe not. She might have just gotten stripped.
What do I mean by stripped? No, the lender didn't get to see Great Aunt Martha naked (shudder). But they might have made off with her home equity. Here's how it works.
The homeowner (usually older and having a lot more home equity than education) is approached by a sleazeball, perhaps even door-to-door. She might even give him lemonade and cookies......he abuses the nice lady's hospitality by offering her a new mortgage but leaving out silly little details like mandatory disclosures. Say that she only has $100,000 left on her original $300,000 home loan. Her payment at 7% is $1,996 a month. But he offers her a new loan with a payment of only $995 a month and she happily signs on the bottom line.
Why Is this a Bad Idea?
Great Aunt Martha only had five years of paying on her mortgage before it would have been gone forever. And now she has a new 30 year mortgage. But that's not the worst of it. Her new rate is 10%! Go ahead, put that into a mortgage calculator and you'll see. And that's not all -- that scoundrel charged her $10,000 to get the loan -- that's ten points! So now she has a $110,000 30-year mortgage at 10%. He stripped$10,000 of equity. And that's mild. Predators look for older homeowners with poor credit because they are unlikely to shop around for their home loans and more likely to have home equity that can be stolen.
So What Should You Be Doing for the Great Aunt Marthas in Your Life?
If Aunt Martha is really strapped for cash, look into a Home Equity Conversion Mortgage with her. It's regulated by HUD, and she doesn't need income or even good credit to qualify. An HECM can pay off her current mortgage and maybe even give her some extra cash too. Reverse mortgage counselors can help her determine if that's her best option, or if something like a home equity line would be a better choice.
What Can Strippers Teach the Rest of Us?
Never take out a mortgage without seeing a Good Faith Estimate and a Truth-in-Lending disclosure. Always shop with several lenders, and never go with one who makes unsolicited offers. Shopping online is a great way to make sure that you aren't being targeted by preditors.
