If it's such a minefield out there for consumers in home equity land, what can people do to protect themselves? Here are some tips from the experts.
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Choose a reputable lender.
That doesn't mean you should dismiss every telemarketing call or direct mailer, but it does mean you should be careful when using a company you've never heard of. Try going to a bank, credit union or other federally regulated institution first. If that doesn't work, consider no-name brokerages only if you've checked out their backgrounds via references, referrals and state licensing agencies, which keep tabs on businesses and individuals who have been censured.
- Negotiate and shop.
It sounds simple, but it can be the best way for consumers to avoid getting scammed with above-market fees. Most subprime home equity loan charges are negotiable because they are charged by brokers who can accept less or more money for their work, rather than by banks, which may have set fees that apply to all transactions of a certain type.
- Keep your eyes on what elderly relatives are doing,
especially if they live alone or don't have the same level of financial savvy you have. Equity scammers often target older Americans because they are generally more susceptible to friendly sounding salesmen. One attorney who specializes in victim protection recalls a case where the lender actually sent birthday and holiday cards to a woman even as it was allegedly bilking her out of her equity.
- Know your credit standing.
Borrowers are generally classified with letter grades such as A, B, C or D, depending on the number of times they've been late on consumer loans or mortgages, filed for bankruptcy, applied for credit cards in the past few months, etc. While the exact boundaries between each category vary by lender, consumers should be able to figure out approximately where they stand with a little common sense. As of late September, an "A" borrower can expect to pay about 8.5 percent to 9 percent for a standard home equity loan while a "D" borrower might be looking at an interest rate in the mid-teens. See our related story on how to check your credit rating.
- Don't sign documents the lender promises to complete
later just to avoid minor hassles. If you have to take a half-hour off of work to come back tomorrow and sign a completed, typed document, do so rather than signing some handwritten application that the broker or lender can change behind your back.
- Consider getting some financial counseling
from a local nonprofit or government-affiliated group if you've never dealt with a home equity loan and are unfamiliar with how they work. The National Foundation for Consumer Credit runs Consumer Credit Counseling Service offices in many cities, for example, and some offer housing advice. People can locate an office near them by using the group's Web site or by calling 1-800-388-2227.
- Try taking a last look at everything after closing
when there isn't a loan officer hovering over you. Borrowers have a three-day "right of rescission" with home equity loans, meaning they can cancel their transactions and get all their money back if they choose to do so.