Definition
Flipping (Loan) refers to the process where a lender induces a borrower to repeatedly refinance an existing mortgage, charging high fees each time for the new loan and prepayment penalties on the old loan. This practice often results in the borrower becoming increasingly indebted, struggling with unaffordable payments, and potentially facing default and foreclosure. It is considered a form of predatory lending, where the lender profits from the borrower’s financial detriment.
Examples
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Example 1: Clyde Clueless is persuaded by his lender to refinance his mortgage due to a slight drop in interest rates. The lender imposes five discount points and a significant application fee on the new loan. Although the interest rate appears lower, Clyde’s monthly payments increase along with his principal debt. The lender’s primary motive is to trap Clyde into an ever-increasing debt loop, making it nearly impossible for him to repay.
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Example 2: Jane Doe is convinced by her mortgage company to switch to a new loan with supposedly better terms every two years. Each time, she incurs fees that are rolled into her loan amount, while prepayment penalties for her previous mortgage deplete her equity. Over time, Jane finds herself owing more than her property’s value, leading her closer to foreclosure.
Frequently Asked Questions (FAQs)
Q1: How can I identify if I’m a victim of loan flipping?
A1: Signs include frequent solicitation from your lender to refinance with high upfront fees and prepayment penalties that are added to your loan balance. Monitoring your loan agreements and seeking advice from financial advisors can help in early identification.
Q2: Are all offers to refinance my mortgage considered loan flipping?
A2: No, legitimate refinancing can provide benefits like lower payments or better terms. However, be cautious of frequent and unsolicited refinancing offers that seem too focused on fees and penalties.
Q3: What should I do if I suspect my lender is flipping my loan?
A3: Contact a consumer protection agency or seek legal counsel to review your mortgage terms and lender practices. Reporting predatory lending activities can lead to interventions that protect your financial interests.
Related Terms
- Mortgage Refinancing: The process of replacing an existing mortgage with a new one with different terms.
- Fees: Charges incurred during the loan process, including application fees, discount points, and other service charges.
- Prepayment Penalty: A fee charged to borrowers if they pay off their mortgage loan early.
- Default: Failure to repay a loan according to the agreed-upon terms.
- Foreclosure: The legal process by which a lender takes possession of a property when the borrower fails to repay the mortgage.
- Predatory Lending: Unethical lending practices that impose unfair or abusive loan terms on borrowers.
Online Resources
- Federal Trade Commission: Predatory Lending Practices
- Consumer Financial Protection Bureau: Understanding Mortgage Terms
- HUD’s Guide to Avoiding Foreclosure
References
- Federal Trade Commission. (n.d.). Flipping and High-Fee Mortgage Lending.
- Consumer Financial Protection Bureau. (n.d.). Common Predatory Practices by Lenders.
Suggested Books for Further Studies
- “The Truth About Money” by Ric Edelman - A comprehensive guide to personal finance, including mortgage practices.
- “All About Mortgages” by Julie-Gorton Carrilo - A detailed book on mortgage basics, refinancing, and potential pitfalls.
- “Nolo’s Essential Guide to Buying Your First Home” by Ilona Bray - Great for understanding mortgages and protecting yourself from predatory lending.
