What Is a High Cost Home Loan?

Don't gamble with your future on risky home loans.

Sold to people who lack full income documentation, such as waiters and the self-employed, or who want low payments, high-cost loans include mortgages with higher interest rates and fees--costing the consumer more money upfront and over the life of the loan.

Interest Rates and Fees

Interest rates on high-cost loans (often called subprime loans) are at least 1.5 percentage points higher than the norm, and sometimes more. Upfront bank fees may also be higher.

Buyer Counseling

Many state laws now require that buyers who plan to take out high-cost loans receive counseling by state-approved mortgage counselors.

Deceptive Practices

In the 2000s, high-cost loans were sometimes made under deceptive circumstances. No-documentation loans allowed consumers to misrepresent income. Also, some lenders made other types of loans to consumers who did not understand the terms.

High Cost Terms

High-cost loans often have terms that look good at first, such as negative amortization, which allows small payments but adds more principal each month. Interest-only payments and unmanageable balloon payments are two other examples.

High-Cost Loan Law

The Truth in Lending Act was amended under the Home Ownership and Equity Protection Act (HOEPA) in 2008 to bar certain practices and require lenders to verify that borrowers can reasonably repay their loans.

References

• New York Times Real Estate Section: New Lending Rules Coming
• Federal Reserve Press Release: Board Issues Finbal Rule
• Federal Trade Commission: High-Rate, High-Fee Loans (HOEPA/Section 32 Mortgages)