High-cost mortgage: A mortgage loan with above-average fees or interest.
High-cost mortgage: A mortgage loan with above-average fees or interest, usually awarded by the bank when a homeowner doesn’t qualify for an established mortgage because of credit or income complications. Federal law sets the definition of a high-cost home loan and places certain requirements and restrictions on banks to safeguard homeowners from predatory lending practices.
Buyer Beware: Avoiding High-Cost Mortgage Loans
The Credit Union National Association defines a high-cost mortgage loan as one in which:
- The annual percentage rate (APR) surpasses the yield on Treasury securities by more than eight percentage points for first liens, or by more than 10 percentage points for subordinate lien loans; or
- The total points and fees payable at or before loan closing will surpass the greater of 8% of the total loan amount.
- The APR surpasses the average prime offer rate (APOR) by more than 6.5 percentage points for a first-lien transaction, or 8.5 percentage points for a subordinate lien transaction; or
- The total points and fees known at or before consummation will exceed 5% of the total loan amount for a loan amount of $20,000 or more; and the lesser of 8% of the total loan amount or $1,000 for a loan amount less than $20,000; or
- The creditor is allowed to impose a prepayment penalty more than 36 months after consummation, or prepayment penalties that can exceed more than 2% of the amount prepaid.
One important rule of thumb to follow when it comes to mortgage loans is – if it’s too good to be true, it probably is.
Under the 2013 Home Ownership and Equity Protection Act (HOEPA) Rule issued by the Consumer Financial Protection Bureau, ” Creditors must provide a list of homeownership counseling organizations to most mortgage loan applicants within three days of application. This requirement applies to most types of closed-end and open-end credit transactions, including high-cost mortgages.
“Prior to making a loan that permits negative amortization to a first-time borrower, a creditor must confirm that the consumer received homeownership counseling. This requirement applies to most types of closed-end loans secured by a dwelling, but will not apply to high-cost mortgages (which cannot have negative amortization).”
Homeowners should demand that a lender meet these requirements in order to avoid being trapped in an endless cycle of debt.