Financed Credit Insurance
Loan product paid for by the borrower that repays the lender should the borrower die or become disabled. However, the total premiums for the life of the insurance policy are added to the amount of the loan.
Generally, in the single-premium credit insurance (also known as SPCI), five years worth of premiums are added directly to the loan amount. The borrower then pays interest on this amount for the life of the loan and typically has not even begun reducing the loan’s principal balance by the time the five-year credit life insurance coverage period expires. Consequently, when a borrower moves or refinances out of a Sub prime loan after five years, all of the premiums for the terminated insurance are stripped directly out of the borrower’s home equity.
If you choose to purchase this type of insurance policy get it on your own from an insurance company.
Undisclosed Prepayment Penalties
Hidden or deferred fees can strip significant equity from borrowers. Prepayment penalties are usually equal to six months of interest if the consumer refinances or sells the home before the prepayment penalty expires. If a loan carries a prepayment penalty, the consumer should be informed of the prepayment penalty before signing their loan documents. In addition, the prepayment penalty should not be longer than the rate is fixed for.
Some loans have prepayment penalties because lenders want to ensure that they make a certain amount of interest on a loan before the consumer gets out. Prepayment penalties come standard on sub prime loans or higher risk loans (FICO scores below 620). In certain situations, a program with prepay is okay if the consumer is using the loan as a bridge loan to help them fix their credit. The lenders that have standard prepayment penalties also have options to remove the prepayment penalty by taking a higher rate and/or by paying fees.
So on a $300,000 home loan that is financed at a 7% interest rate, your prepayment penalty to get out of the loan early would be approximately $10,500. If you had the same loan amount and an interest rate of 9%, your prepayment penalty would be approximately $13,500.
Prepayment penalties are usually equal to six months worth of interest if the borrower prepays at any time, for any reason, during the first three to five years of the loan. For a 10% interest rate loan, the penalty would be 5% of the loan balance. On a $150,000 loan, this fee is $7,500, more than the total net wealth built up over a lifetime for the median African American family. It’s estimated that these Sub prime prepayment penalties cost 850,000 families $2.3 billion each year.
Rate Discrepancy
Over 50% of families are paying a higher interest rate on their mortgage than they qualify for. The reason is broker and lenders make more money when they charge higher rates.
The higher your rate the more interest you pay the longer it takes for you to pay down your loan.
It is reported that over 63% of minorities who are eligible for conventional loans are placed in Sub-prime programs. Sub prime loans carry higher rates and fees, and many sub prime loans (35 to 50% according to Fannie Mae and Freddie Mac) are being made to borrowers who could have qualified for prime loans.
How to Protect Yourself from Predatory Lending?
1. Understand your credit position and position it before you buy a home
2. Put a budget together before refinancing or purchasing a home so you do not over extend yourself.
3. Ask the broker about your loan program if it is an adjustable ask them what your Margin is, Your Index and The Cap on your loan.
4. Ask for a Good Faith Estimate – this will outline your loan amount, your loan program, the costs of your loan, and your monthly payment.
5. Do not sign any blank paperwork
6. Check to see if your loan officer is licensed with the correct agency
7. Attend seminars and workshops to empower your self
The best way to protect yourself is to contact FCLS today or Apply directly online 24 hours a day. We are here to help you protect your investment. |
