While our economy is rocked by the COVID-19 pandemic, many people’s incomes have been disrupted. Whether due to layoffs, reduced hours, or furloughs, the need to stay home has caused tremendous financial hardship for individuals.
One potentially scary outcome of the situation is the need for people to tap into their home equity. More homeowners are exploring options like refinancing, 2nd mortgages, HELOCs (home equity lines of credit), or other ways to cash in some of the equity they’ve build up in their homes in order to meet their living expenses.
Anyone considering these options should be very careful. There are always a lot of predatory scammers looking to take advantage of people in financial need, and a global crisis like COVID-19 is the kind of event that draws out these predators.
More Resources: 5 Steps to Take if You are the Victim of a Loan Scam
We urge anyone thinking about tapping into their home equity to beware of these 4 scams:
When a lender persuades a homeowner to get multiple mortgage refinances repeatedly, that’s loan flipping. We’ve seen cases of elderly homeowners persuaded to refinance their mortgage every year. This kind of victim may not realize how much they’re being taken advantage of.
Refinancing might let you cash out some equity, and it also might reduce your monthly payments—for example, if you had 10 years left to pay off your mortgage and refinanced into a lower Interest rate at either a new 15 or 30-year loan, then your payment could be lower. For the borrower, this might feel like a good move; you walk away with a little bit of cash, and your mortgage payment went down. But beware as more of your equity can be used to cover any fees and closing costs for the refinance, so your equity just got lower than you think. There are also other fees associated with a refinance, such as an appraisal, so be fully aware of what refinancing might cost you.
Related Article: 5 Tips for Avoiding Foreclosure Scams
With loan flipping, lenders try to do this repeatedly. Home lending experts advise homeowners to keep their mortgage intact for years—usually it takes 5 or 6 years before refinancing might make financial sense. If you do it more often than that, the cost of refinancing may outweigh the financial benefits to you.
To avoid this scam, be careful how often you refinance your mortgage. Talk to a HUD-approved housing counselor if you have questions or concerns about any mortgage loan transaction. If the same mortgage loan officer approaches you to refinance year after year that’s a red flag. If you do enter into a refinancing, compare options and review the costs very closely and make sure you review all the paperwork and disclosures thoroughly, and talk to someone you can trust before signing anything.
We talked in the last example about how multiple refinances can strip away some of the equity you’ve built up in your home to pay lending fees and closing costs. With loan flipping, the scammer uses frequent, repeated refinancing to take that money. With equity stripping, the scammer is more aggressive, and can end up owning your home.
This scam is sold as a way to cash in the equity from their home while still being allowed to live in the house.
The scammer pressures a homeowner into a new home loan the borrower can’t afford. Expecting the borrower will fail to repay and then the home can be foreclosed upon.
In another version of this scam, the homeowner essentially sells the home to the scammer, though homeowners don’t often understand that ownership is actually changing hands. Then the new owner starts charging rent of the occupants. The new owner can even raise the rent, and evict the former homeowner if they don’t make the new payments.
Equity stripping is particularly dangerous when people are in financial trouble. Scammers target people who are facing foreclosure or other financial hardships, and make false promises of relief. Beware of anyone who pops up at what seems like the perfect time promising to let you cash in the equity you’ve built up without any consequences. With equity stripping scams, you could lose your home and all of the equity you’ve accumulated.
Home Improvement Scams
There are a lot of home equity scams around the world of home improvement. Any time you’re using equity from your home to pay for home improvements, you’ve got to be careful.
That’s not to say you shouldn’t do it. Indeed, using home equity to improve the property is one of the few times we think tapping into home equity can be a good idea. But how you access that equity is something to be cautious about.
Usually, these scams start with a home contractor offering services, like a new kitchen, replacement windows, etc. They’ll quote a reasonable price, and if you say you don’t have enough money for that job, the contractor offers to connect you with a lender who will help you borrow against the equity in your home to pay for the home improvements.
More Resources: Easy Renovations to Help Increase the Resale Value of Your Home
What’s dangerous about this scam is that it’s easy to point to reputable experts who say it’s a good idea to borrow against your home if that loan is used to make your home more valuable. We’ve said here on credit.org, it’s not the idea of a home equity loan for home improvement that’s bad, it’s who you get it from.
Never start the borrowing process with a contractor. This is big red flag. Even worse, the kind of scammers who abuse home improvement products to steal from you often tear up your home and disappear, so you lose your money and your home ends up in worse condition than you started.
Don’t sign any documents without reviewing them, and talk to a HUD-approved housing counselor if you have any questions. And if you’re looking to improve your home using home equity borrowing, start with a lender you trust, not one your contractor steers you toward. Hire home improvement contractors carefully. The entire process of home improvement should be driven by you, not something you’re persuaded into by a contractor you’ve just met.
Changing Terms During Servicing
Many predatory lenders make extra money by using bait-and-switch tactics. They’ll show you one set of paperwork when you apply for the loan, then switch to completely different terms when the signing day comes. Those new terms can have higher fees and traps to make it harder for you to make your loan payments.
This kind of scam happens in every industry. There are times car salespeople will get you to sign a deal for a car at a great price and interest rate, only to come back and say they couldn’t get that deal approved. If this happens to you, leave immediately. Lenders who use these tactics are going to keep adjusting terms in their favor to extract the maximum they can out of you.
Any time a term seems too good to be true, whether it’s low fees, interest, or closing costs, watch carefully to be sure those terms don’t change at any point in the process. If anything does change and it’s a worse deal for you, stop the process and don’t sign anything else. Find a different lender to do business with.
When you negotiate with a lender, you’re asking them for the best deal they can give you. If they offer one thing and try to deliver another, they’ve misled you. At best, they don’t have a good idea of what kind of terms they can really offer, so you shouldn’t trust their competence about any other aspect of the process. Just walk away.
If you are nervous about potentially changing terms during servicing, talk to a HUD-approved housing counselor for one-on-one assistance. A reputable nonprofit counselor will help you spot scams early and avoid them.