RESEARCH & LEARN

How to Identify Predatory Second Mortgage Lending Practices


Mortgage Newsletter

Check Local Mortgage Rates

Today's Average 4.80%

Calculators

FEATURED CALCULATOR

Loan Program Choices

Use our calculator to find out your estimated monthly payment in advance: Enter the loan amount, interest rate, and length of mortgage.
Try our Mortgage Payment Calculator


TERMINOLOGY

Second mortgage lending occurs when a mortgage lender offers to get you another mortgage loan. You can use this second mortgage to pay for home improvements, buy another property or establish a home equity line of credit. Unfortunately, many second mortgage lenders are prone to engaging in predatory lending practices. While those practices often fall within the letter of the law, they are deliberately designed to take advantage of you and enrich the lender at your expense. So, if you want to avoid getting stuck with a bad second mortgage loan, you must be able to identify predatory second mortgage lending practices before you sign up for anything.

Understanding Second Mortgage Loans

Your second mortgage loan is handled in mainly the same ways as your original mortgage loan. You have to make the same types of monthly payments, and your house is used as collateral. The key difference between the first mortgage and the second mortgage is that, if you default, you have to pay off your first mortgage before you pay off the second mortgage. As far as the lenders are concerned, this makes second mortgages riskier. This allows them to charge higher interest rates and other monthly fees. This also allows them to charge preparation and closing fees that are unique to second mortgage.

Second Mortgage Fees and Predatory Lending

The second mortgage fees mentioned above can get fairly hefty, but they are not considered predatory unless they are so large that paying them won't make the second mortgage worthwhile. That is why you must request a Good Faith Estimate, the detailed breakdown of all the fees that come with the second mortgage and the lender's best guess as to how much they will cost you.

Lending beyond Your Means

When a scrupulous lender gives you a second mortgage loan, it wants to make sure you have the means to repay it. The predatory lender has no such reservation. When you fall behind on your payment, it will offer either another mortgage or refinancing on any of your existing mortgages to supposedly help you out. While it will help in the short term, you will wind up needing more money to repay it in the long run, which gives the lender an excuse to offer you yet another mortgage. In the worst-case scenarios, the cycle will be repeated so many times that you'll have no choice but to declare bankruptcy--or worse.

The best way to avoid this is to look at the total value of the mortgage and divide it by the length of the loan (in months). Then, take the interest rate and add it to that number. Compare this amount to the monthly earnings. If your monthly mortgage payments exceed 20 percent of your monthly earnings, look for another loan.

Bait-and-Switch

This predatory lending practice avoids being an outright scam on a technicality. When a mortgage lender offers you a second mortgage, it may advertise it by citing what look like fairly good terms. However, the actual contract that you have to sign will contain different terms, terms that may not be favorable to you. The lender will show you the contract, but at the same time, it will try to make sure you don't read it too closely. The best way to avoid this is to simply ignore the lender's suggestion and read the contract as closely and as thoroughly as possible. If you see anything you don't understand, you have a right to ask the lender for clarification--and should do so. You also have a right to hire a lawyer to go through the contract for you. If the lender shows reluctance to let you do either of those things, you should look for a second mortgage somewhere else.