Avoiding Predatory Lending
Predatory lending has been around for many years, but only recently has it received the kind of attention that it deserves. In New Haven, many homeowners have fallen prey to lending practices that threaten their ability to afford and retain their homes. To avoid confusion, it is important to understand the difference between sub-prime and predatory mortgages.
Sub-prime mortgages are loans made to borrowers with less than “A” credit—that is, to borrowers who have had some (possibly minor) credit problems. Interest rates are generally higher than on “prime” loans. Predatory mortgages are loans with terms, conditions, and fees that literally prey on a homeowner’s equity or income. Predatory loans have exorbitant interest rates, expensive origination fees, and pre-payment penalties that make it difficult for borrowers to pay off their loans early. In addition, most predatory loans have adjustable interest rates that cause monthly payments to increase dramatically when the interest rate resets. Rising delinquency and foreclosure rates are directly tied to the abusive lending practices that underlie predatory lending.
Homebuyers may be tempted by predatory loans when they are unable to obtain conventional financing, and existing homeowners may be lured into a predatory loan when offered a “cash-out” refinance. Proper homebuyer education and counseling is essential if we are to help our prospective homebuyers and existing homeowners to obtain good mortgages from reputable lenders.
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