A high-cost home loan is a mortgage with above-average fees or interest. If you don't qualify for a conventional mortgage because of credit or income problems, you may instead receive a high-cost home loan offer from a lender. Federal law sets the definition of a high-cost home loan and places special requirements and restrictions on lenders to protect borrowers from predatory lending practices.
A high-cost home loan exceeds one of two thresholds set by the federal government: the interest rate threshold or the point and fees threshold. The interest threshold for a first mortgage is a rate of 8 percent above the U.S. Treasury securities rate. Second and mobile home mortgages have a threshold of 10 percent over the securities rate.
For loans over $20,000, the point and fees threshold is 5 percent of the loan amount. The threshold for loans under $20,000 is the lesser of 8 percent of the loan amount or $1,000. A mobile home loan's points and fees threshold is 3 percent of the loan amount.
Lenders must give written disclosures to borrowers receiving a high-cost loan. You must receive a notice stating you have the right to cancel the loan, even if you've already signed the papers, within three business days of signing. The lender must disclose the annual percentage rate and other terms related to the loan. For example, if your loan has a variable interest rate, the lender must tell you how high your monthly payments could go. You'll also receive a notice explaining that the lender can take your home if you fail to make payments.
High-cost loans can't have certain features under federal law. You can't have a balloon mortgage, in which your payments cover only interest and the loan balance is due at the end of the loan, for a term of less than five years. A loan can't have negative amortization — in which you make small payments that don't cover the loan balance and increase the principal amount you owe — or a default interest rate that's higher that your loan rate. Other banned features or terms include prepayment penalties in some cases and some types of consolidation payments on the repayment agreement.
Lenders can't give you a high-cost loan based on the property's value; the lender must consider your ability to repay the debt. You can't refinance a high-cost home loan into another home loan within the first 12 months unless it benefits you financially. A lender must document high-cost loans correctly, as either open-end or closed-end. If you have a closed-end loan, the money is usually sent out only one time, at the loan's closing. An open-end loan, such as a home equity line of credit, has repeated transactions, as you draw off the line over a period of time stated in your loan agreement.
You may sue a lender who violates laws regarding high-cost home loans. A borrower who sues a lender for violating high-cost home loan laws may receive damages, legal fees and cancellation of the loan for a maximum of three years.
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