If those mortgage fees appear suspiciously high, if you feel pressured to sign mortgage loan papers and some of the pages are blank or if you don't quite know the difference between a piggy-back loan and an option payment loan, don't borrow trouble.
Call "Don't Borrow Trouble -- Silicon Valley" the newest installment of a 40-city anti-predatory loan practices movement to protect borrowers from risky loans that could cost them their home.
Predatory lending practices, which often target more vulnerable consumers including ethnic minorities, the young, old and those with less income and education, typically use high loan costs that strip equity from home owners.
The costs come in the form of repeatedly refinancing a loan within a short period of time, charging high points and fees with each refinance, packing a loan with unnecessary insurance products and charging excessive rates and fees to a borrower who qualifies for lower rates and fees.
ACORN, (Association of Community Organizations for Reform Now), the California Reinvestment Committee and Consumers Union, publisher of Consumer Reports, are just a few of the organizations that have documented high levels of levels of minorities targeted by predatory lending practices in major California cities including the Greater Silicon Valley area.
Since July 2002 California law has offered special anti-predatory protection from predatory loans in regulation. The measure is tougher than the federal anti-predatory lending Home Ownership Equity Protection Act of 1994 (HOEPA), but not as strong as measures in some individual California cities.
The fast-escalating and high cost of housing in Silicon Valley has also fostered growth in the use of risky interest-only payment loans, optional payment loans, piggy back mortgages, and other forms of mortgages that give home buyers greater buy-now-pay-later financial leverage.
The loans are inherently riskier than plain vanilla 30-year, fixed rate mortgages and pitching them to home buyers who are financially stretching too far is also considered predatory.
In just one example of the level of risky loan use in the area, 62 percent of home purchase loans during the first half of 2004 used piggy-back financing in the San Jose Metropolitan Statistical Area according to "The Hidden Risks of Piggy Back Lending" published in June this year by PMI Mortgage Insurance Co. in Walnut Creek, CA.
Piggy-back financing is useful when a home owner can't come up with all or some of a 20 percent down payment. The first mortgage finances 80 percent of the home purchase and a second mortgage is piggy-backed onto it to cover part or all of the down payment.
The financing also saves the borrower money on private mortgage insurance premiums, which is usually attached to mortgages with less than 20 percent down. The financing also can save the borrower on mortgage interest rate costs which are higher when the first mortgage is more than 80 percent of the value of the home.
In addition to piggy-back mortgages, a large share of all first mortgages used to buy a home or refinance an existing mortgage is the interest-only payment loan variety, which allows the borrower to pay only the interest each month. That leaves the principal payments due years down the road when the cost of contracted loan rate adjustments, refinancing, balloon payments or other adjustments upward in cost will be necessary.
The loans are fine for those who aren't going to be in the homes beyond any adjustment period, but they are not always so fine for long-term home owners who will remain in the home when the adjustments come due.
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