If you’re curious about the meaning behind a high cost home loan, you should know that these are mortgages with higher than average fees or interest. You may be in the market for a high cost mortgage after failing to qualify for a conventional mortgage. The most common reasons that people don’t qualify for a traditional mortgage is income or credit issues, but there is still an opportunity to finance your house through a high cost mortgage.
Federal law actually outlines the definition of a high cost loan and sets certain requirements on lenders. This is an effort to reduce predatory lending practices and is ultimately in place to protect you, the homeowner.
Defining a High Cost Mortgage
This mortgage will exceed one of the two thresholds placed by the federal government, the interest rate threshold and the point and fees threshold. A high cost mortgage might have an interest rate of 8 percent higher than the U.S. Treasury Securities rate (second and mobile home mortgages, however, are 10 percent over the securities rate). The second threshold refers to points and fees and is broken down as follows:
- For loans higher than $20,000, the point and fees threshold references 5 percent of the loan amount
- For loans less than $20,000, the threshold is the lesser of 8 percent of the loan amount of $1,000. For mobile homes, the points and fees threshold is 3 percent of the loan amount.
Anything mortgage that is defined as a high cost home loan is forbidden from including certain features as a result of federal law. Balloon mortgages, for example, are not allowed. This refers to situations where your payments only cover interest, leaving you with a hefty loan balance at the end of the short loan period. Negative amortization is prohibited, too, which is a loan in which you make small payments that don’t actually cover the loan balance and lead to a higher owed principal amount. Finally, these loans cannot include prepayment penalties.
- There are banned features in place to protect you when you obtain a high cost mortgage. These include a balloon mortgage, negative amortization, and prepayment penalties. Sometimes, consolidation payments on the repayment agreement are forbidden, too.
In order to receive a high cost home loan, the lender must provide you with written disclosures. Your notice should include you the ability to cancel the loan, even if you have already put your name on the dotted line. This gives you a period of three days after signing the loan in which you can walk away from the loan.
The lender is also required to notify you about the annual percentage rate included and other relevant loan terms. If you have selected a mortgage with a variable interest rate, the lender has to give you notification about how high your monthly payments might go. Finally, there should be a notice that a lender has the right to take your home if you fail to make payments.