What Are High Cost Loans?
High cost home loans are high interest rate loans provided to subprime lending candidates. While these loans have the potential to be troublesome in terms of interest rate changes or accelerated payment schedules, there are some benefits to securing a high cost home loan, and they may be useful in limited circumstances after careful research.
Other People Are Reading
-
Hallmarks
-
High cost home loans have two defining characteristics. First, high cost home loans -- as the name implies -- are accompanied by high interest rates. The interest rate on these loans, also known as subprime or predatory loans, can be several percentage points above the prime rate used by lending institutions. Second, on the face of the lending documents, these loans look attractive because the payment schedule initially calls for small payments. However, the complicated contract language, fine print and/or addendum typically reveal triggering events, such as an adjustable interest rate or balloon payment, that can drastically increase the amount due.
Clientele
-
High cost home loans are frequently used by individuals who are not considered to be ideal loan candidates. These individuals are often people who have low credit scores attributable to poor management of their finances or unforeseen circumstances, such as loss of a job or a significant illness. High cost home loans allow these individuals to secure needed monies while rebuilding their credit history. The high interest rate charged on the loan represents the risk that the lender is taking in loaning money to a less-than-qualified candidate who is more likely to default on the loan than someone with good credit.
-
Problems
-
High cost home loans are associated with an array of problems once a default has occurred. Whether the debtor's monthly payment substantially increases, a balloon payment of the entire balance becomes due or excessive lending institution fees are assessed, the end result is often that the debtor is unable to pay under the terms of the agreement, and fees continue to rack up at a speed with which the debtor cannot keep pace. In a short period of time, the debtor can be in an astounding amount of debt that is out of proportion to the original amount borrowed.
Regulation
-
High cost home loans are heavily regulated by both the federal and state governments as a result of the subprime mortgage crisis the United States experienced beginning in 2008. For example, many states now require borrowers to receive financial counseling prior to signing a high cost home loan. Also, lending institutions, under the Truth in Lending Act, may no longer encourage high cost home loans unless they can document the borrower's ability to repay the loan.
-
References
Resources
- Photo Credit Jupiterimages/Photos.com/Getty Images
