Some common practices borrowers should be wary of

Charging excessive or unnecessary fees

Unusually high costs for mortgage or real estate brokers or for settlement services may be added to the loan without being clearly explained to the consumer. These fees (often described as "points"), when added to the principal of the loan, can add thousands of dollars in unnecessary costs. If you do not have the cash to pay these fees when you take out the loan, be aware that the lender will add these fees to the amount you are borrowing. Be sure that you understand the nature and full cost of any fee before you sign any documents.

Requiring unnecessary insurance

Some brokers or lenders will add unnecessary insurance to the loan. Often consumers are not informed that this insurance is optional, and will substantially increase the cost of the loan. This insurance may be single premium credit insurance (insurance paid in one lump sum to insure against default on the loan), disability insurance, or life insurance. The insurance may only protect the consumer against disability or death for 5-7 years, while the loan has a 30-year payback plan. Some predatory loans have a consumer paying for insurance years after the policy has expired. The documentation that you receive from the lender before signing for the loan should outline clearly the amount you are paying for insurance and the length of time that the insurance is valid.

Steering into high interest rate loans

Brokers or lenders may "steer" consumers who qualify for prime loans into more expensive, subprime loans. If you know your credit rating is good and you are feeling undue pressure to take a loan with excessive points, high interest or insurance, check with another lender first.

Balloon payments

Some loans are structured so that after a fairly short amount of time, 5-10 years, one very large payment is required to pay off the remainder of the loan. This is known as a balloon. Balloon loans may make the initial monthly payments very low, but the consumer must refinance these loans before the "balloon" payment is due, or the consumer will be asked to make a payment of thousands or hundreds of thousands of dollars. Consumers who are unaware of balloon payments in their mortgage may later be in danger of foreclosure. Consumers can lose all of the money they have put into their homes and the home itself if they cannot meet the large balloon payment at the end of the loan. To guard against unknowingly agreeing to a balloon, please be sure to ask for a copy of the proposed payment schedule and study it carefully.

Home improvement loan fraud

Unscrupulous home improvement contractors are a notorious part of predatory lending. These contractors may canvass neighborhoods, offering to arrange loans to finance home improvements. Consumers may be pressured into signing these loans without adequately reviewing the terms. In addition, many of these contractors provide substandard work. Be aware of anyone coming to your door with a limited-time or "special offer" if a deal seems too good to be true, it probably is!Flipping"Flipping" occurs when a lender, mortgage or real estate broker encourages a homeowner to refinance their loan repeatedly over a short amount of time, with no financial benefit to the homeowner. Consumers may be told that they are refinancing their loans at a lower interest rate, and that they may have lower monthly payments, however, the total cost of the loan may be higher. A consumer whose initial loan has a large balloon payment may then be given a refinanced loan that still does not have terms that the consumer can meet. The lender or broker may make a lot of money in the fees they charge in each transaction, and in the end, the consumer may be left with more debt than they can pay. Again, if you are unsure of the benefits of the loan proposal being made to you, ask a third party for advice.

Asset based lending

Asset based lending is the practice of making a loan to a consumer based on the value of their home (their "assets"), not their ability to repay the loan. Therefore, a consumer with a home with a lot of equity but a low income may be given a loan with payments that are too large to make, and the consumer may be in danger of losing their home. No matter the terms of your loan, make sure you are comfortable with the proposed monthly payment in relation to your personal budget.

Prepayment penalties

To prevent a consumer from paying off their loan in advance, some lenders charge a penalty for early pay off. These penalties may make it difficult for consumers to refinance their loans at a lower rate, as well. The documentation given to the consumer prior to signing for the loan should clearly state if there are any prepayment penalties in the loan, and what the penalty is.

Negative Amortization Loans

Negative amortization occurs when the mortgage payments do not cover the full amount of interest due. As a result, the principal balance increases rather than decreases because the unpaid interest is added back to the outstanding mortgage principal. Depending on the rate of appreciation with housing values in the real estate market where you live, this may negatively affect the equity that you have invested in your property. Be sure to carefully read all loan documents and disclosures to determine if your loan terms allow for the possibility of negative amortization - if they do, be sure that the loan is right for your particular situation.