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Is the Mortgage Predatory?

Many homeowners receive solicitations to refinance their homes or to take home equity loans. The solicitations come in the mail, making it sound as if monthly payments would be greatly reduced and that the homeowner would be left with extra money to pay off other credit bills, to make home improvements, or to invest. Knowing how to read the solicitation and advise the client as to whether to accept the offer is an important skill the new lawyer would be wise to develop.
 
The ad says, "We will restructure your loan at 0% for five years." That sounds like a great bargain. No interest for five years. But wait: Read the fine print, which is so small that you need a magnifying glass to read. There you will learn that the company is not charging zero interest; it is just waiving the payment of the interest. At the end of the five years, all of that deferred interest will be added to the principal, and the homeowner may very likely owe more at the end of the five-year period than when it started.
 
The ad says, "Low fixed rate mortgages." This is printed in large type in red letters. Below are rates of 5.15%, 6%, but these rates are ARM, meaning they are adjustable. The teaser is that what looks like a great fixed rate is in fact just another short-term teaser rate. In a very short period of time, the monthly mortgage payment will rise and could possibly double.
 
The realtor shows your client a house that has all the features he wants in a great neighborhood, but the price is $ 50,000 higher than he feels comfortable spending. The realtor says, "Don't worry. I know someone who can get you a great loan, so you can afford that extra $ 50,000." That $ 50,000 will add $ 300 per month on a 30-year fixed loan at 6%.  With a 4.5% teaser rate, the monthly payment will go up only $ 250, at least for the first year. But after the first year, the entire monthly payment could double. If the client can afford that extra $ 300, but the mortgage broker steers him to a subprime loan so the broker can earn over $ 1,000 in fees, that is predatory lending.
 
Who should bear the burden when your client no longer pays the mortgage? Those against a government bail out say the client should have known better. However, many do not have enough knowledge to ask the necessary questions, and the lenders present the required information in ways design to hide the true effect of the loan. An elderly person can be easily confused and misled. A young couple buying their first house may rely on the realtor who sold them the house. They do not expect the broker to lie to them; they lack experience.
 
The new attorney (aka practicing friend and relative lawyer) would be wise to learn how to read these offers to determine exactly what they mean so proper advice can be dispensed as to what questions to ask.