September 24, 2017
 
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Mortgage Refinancing Cash Out Scams

Cash-out Plans are Hazardous Territory
Dealing with mortgages and refinancing is not easy for most of us. In fact, it can be complicated, especially when presented with so many different options and numbers. Unfortunately, many individuals have been hit by refinancing scams, especially people without a lot of cash and less than perfect credit ratings. Scammers often target those who may feel desperate and ashamed—vulnerable consumers looking for some relief. Your home, most likely, is your biggest asset, which makes it very attractive to dishonest lenders. One scam that can put you at risk for losing your home is the “cash-out” scam.

Cash-Out Refinancing - Defined
An alternative to a home equity loan, a cash-out refinance is refinancing your existing mortgage and borrowing some of the equity in a lump sum to use for other purposes, such as college tuition, vacation, home renovations, pay down debt, etc.   A new, bigger mortgage will replace the smaller, existing mortgage. However, this can prove fatal at times. It should be evaluated on an individual basis as it relates to the specific terms of the loan. There are settlement costs associated with refinancing and the possibility of an early pay-off penalty on your existing loan. It is not wise to do a cash-out refinancing if you’d end up with a higher interest rate and higher monthly payment than what you already have on your current mortgage.

You’ve got the Cash, but no equity
First of all, it’s important to realize that many people who are interested in cash-out refinancing are usually in financial trouble already, making them easy prey for scammers. Because of this, higher interest rates are associated with these loans—usually variable—which means the monthly payments can be higher and increase over time.  Consumers overwhelmed by debt may be willing to overlook this for the time being. In many cases, the monthly payment will later increase to something they cannot afford, which is what the lender is counting on. Desperate, you’ll be back to refinance again, digging yourself even deeper into an unmanageable mortgage. Remember, every time you refinance, it costs you in the form of loan settlement fees that can be thousands. Even if you roll these costs into the mortgage, eventually, there will be no equity left and your mortgage will be more than what the house is worth. Plus, by financing these fees, you’re paying thousands of dollars extra in interest over the life of the loan. Unable to make your mortgage payment, strapped for cash, and no equity left in your home, you won’t have many options and may face foreclosure.

Borrowers have to be extremely careful with lenders. Another trick used in combination with cash-out refinancing is the balloon payment. You may have a smaller monthly payment, but two years into the mortgage, the loan is due, in full, which forces the borrower to refinance again, compounding the
credit problems. If you can’t refinance, you can lose your house. Here’s an example to illustrate the point:

"You’ve spent the last 10 years making monthly payments on your $100,000 home, which amounted to about $50,000. Unfortunately, you have a medical crisis and have $20,000 in medical bills, so you opt for a cash-out refinance. The lender offers to pay off your old loan of $50,000 and write up a new loan for $80,000. You walk away with $20,000 and the lender keeps $10,000 for their service. Your new interest rate is variable and higher than your old one. The result is that the homeowner will end up paying an extra $35,000 to $45,000 over the life of the loan—clearly not a good deal."

To avoid scams, always be aware of the terms and conditions of the loan and review all documents. Don’t sign anything until you know exactly how much your monthly payment will be and for how long. Risking your home for a quick fix to
credit problems or financial problems that can be solved in another way is not worth it. 

 

 

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