In some cases conventional mortgage loans can be hard to receive especially if interested parties have regular income problems, a very effective option is high cost mortgage loan. Purchasing a house is everyone’s dream throughout their lives. And it is not that hard to fulfill if the person can take some mortgage or loans. Going into the real estate market and hiring some real estate agents and lawyers can be a good option but it is best to understand every term and aspect of mortgage and its types before going to any one of these parties.
There are many different types of mortgages available in the market for people to choose from. But in some cases conventional mortgage loans can be hard to receive especially if interested parties have regular income problems. Similarly, any person who has had any previous issues with their credit records. In such scenarios, there are some other options available as well. One very effective option is high cost mortgage loans.
High Cost Mortgage Loans Defined
High cost mortgage loans are those loans which have a higher interest rate attached to them. This means that their attached fees or interest rate is a little higher as compared to the amount set when taking a regular mortgage for any house.
They are more expensive as compared to the government point and fees threshold, as well as APOR threshold for interest. Due to this reason, the borrowing cost becomes much higher than the normal mortgage ones.
Characteristics of High Cost Loans
In order for a mortgage loan to become a high cost mortgage loan, there are a few things that needs to be met for it to fall in the category of high cost loan. There are two different thresholds that the loan and its interest amount should cross, which are:
- the interest rate threshold
- or the point and fees threshold.
A benchmark rate is set by the government of U.S. which is commonly known as the APOR which shows the rate for comparable transaction within that date. The interest rate is at 6.5 percentage points above APOR for the first mortgage application. The point and fees becomes 5% if the amount of loan exceeds $20,000. If the amount becomes less than $20,000 then the fees becomes lesser than 8% of the amount or it can also be amounted to a $1,000.
Furthermore, if there is a pre-existing penalty then there is an additional test applied to the high-cost mortgage. If the loan has been opened for around 36 months and then the penalty is applied, then mortgage becomes high-cost. Similarly, if the penalty is more than the initial payment amount by 2%, then it becomes high-cost loans as well.
Lenders’ Responsibility for High Cost Mortgage Loan
It is of utmost importance that every lender, whether it is a bank or an individual or a private organization lending the money, must inform the borrower when such a situation arises where the interest rate becomes higher than the original rate and the mortgage is converted into a high cost mortgage loan.
Even if the borrower has agreed to the terms and conditions before this development, they have the right to cancel out this loan and break their agreement despite having signed it earlier. Apart from this, it is the responsibility of the lender to inform the borrower about the interest rate which will be set.
Along with that they must inform the borrowers about the annual percentage rate as well. Accordingly, all rates, taxes, hidden charges, and any other amount to be charged to the borrower must be discussed and disclosed to the borrower.
An estimate must be provided to the borrower about how high the costs can go on an annual or monthly basis. This way issues can be resolved and sorted out in the beginning. No confusions can exist in anyone’s mind whatsoever.
Unacceptable Features of High Cost Mortgage Loans
There are some features which cannot be a part of the high cost mortgage loans as per the federal law. Their examples are as follows:
- It cannot charge a fee for changes in the loan or for a loan payoff statement.
- There is a limit set on the late fee charge, other fee charges and practices.
- Lenders cannot ask or encourage the borrower to default on other existing loans in order to switch over to the high cost mortgage loans.
- Lender must ensure that the borrowers who are applying for high cost mortgage loans are genuinely eligible to pay off this loan. Any borrowers who are financially weak and cannot pay the interest amount along with the loan back to the lender should not be offered this kind of a loan payment.
- A high-cost loan cannot be given to the person as per the value of their property for which the loan is being provided.
- Borrowers cannot refinance one high cost mortgage loans into another kind of home loan and vice versa.
- A high cost mortgage loans must be clearly defined whether it will be open-end or close ended. In case of close ended high cost mortgage loans, money is sent out once at the time of loan closing. On the other hand, an open ended high cost mortgage loans, there are multiple transactions as the line is drawn off over the time period of the loan agreement.
High cost mortgage loan can be a complicated concept and need to be understood properly in order to distinguish clearly from the regular mortgage which is given out normally. The best option is to always consult a lawyer or any financial expert when going for such decisions. They are able to guide borrowers as well as lenders better about the next move that they can take.
Moreover, they can provide a basic guideline for how assets can remain safe from both ends and no legal complications can take place when opting for high cost mortgage loans. Real estate attorneys are the best people to consult when going to make a decision for purchasing any kind of property on the basis of a mortgage.