Watch out for the scammers!
Often, when people are chasing for refinancing, predatory lenders and scammers come
out of the woodwork. Particularly when there is a high demand from folks in financial
trouble, fraud risk rises. Refinancing an equity loan can be subject to fraud like any other
loan since much depends on the agent you deal with. Most advice would direct borrowers
to stick with traditional lenders such as banks. However, when borrowers are financial
strapped, banks tend to avoid such applicants. This forces such borrowers to then seek
help from sub-prime lenders, which where the trouble begins.
Fraud risks can include borrowing so much you end up losing your home in default, losing
your money in fraudulent fees, or even suffering identity theft. Even when it's not criminal,
some refinancing can occur in such a way they only benefit the borrower with fees and
high interest while burying a borrower in even more financial problems.
One refinancing scheme that affects refinancing equity loans includes loan flipping. In this
situation, the borrower gets sucked into a plan to refinance to take money out. The lure of
free cash attracts many. However, the catch is that the lender frequently charges a much
higher interest than the original equity loan had. Because the victim borrower is so enticed
by the idea of having cash again, he or she doesn't pay attention to the new loan terms.
Loan flipping is frequently pushed by sub-prime players particularly when a person gets
close to paying off their original equity loan that may be with a sub-prime lender in the first
Another problem is equity stripping. This problem involves outright financial fraud. Through complicated paperwork, sleight of
hand, and promises, the supposed lender gets access to the equity in a borrower's home. While promising the refinance the
equity loan involved, the lender instead takes the cash value that should have gone to the borrower and disappears with it.
The borrower has no recourse, now owes more money on the house, and the so-called lender is off to pull the scam again on
someone else. Sometimes the scam is so bad, the title to the house gets lost and the borrower is stuck with a larger mortgage
balance due a no home ownership at all.
Government Anti-Fraud Efforts
Affecting refinancing equity loans as much as any other real estate lending, federal disclosure rules became required after
January 1, 2010. Specifically, lenders must use additional specific forms with processing any kind of real estate loan. This
includes a Good Faith Estimate (estimate of loan and closing costs to the borrower) designed by the federal government, and
a HUD-1 Settlement Statement form (reconciliation of the loan accounting). These forms push transparency on interest
charges, penalties, fees, and closing costs.
Any lender that tries to process or push a loan without using these forms should be avoided completely. The forms are to be
kept on file with the lender who can be audited by a federal agency as needed. Those not using the forms probably have no
intention of being seen, much less answering to the government or borrower.
Refinancing an equity loan should be approached with all the reservations of a normal home loan. Disregard the potential promises of easy cash and
ask yourself if the refinancing is absolutely necessary. If the answer is still "yes", then take the time to compare lenders and their packages for the
best alternatives. Also make sure the lenders follow the letter of the law in lending. Pay close attention the terms and compare the new package with
your existing equity loan details to fully understand the changes involved. Remember, despite all the government protections, the loan business is still
predominantly a "buyer beware" environment.
Beware of fraud in the refinancing marketplace, scammers abound.