Foreclosure bailout trap

The foreclosure bailout trap is perpetrated by mortgage brokers and lenders. Although the term "foreclosure bailout" can sometimes be used to describe any technique that helps you avoid foreclosure, in this case, we are referring to loans used for that purpose.

When you are being threatened with foreclosure being offered a loan to get you out seems like a godsend. What will usually happen is that you'll get calls and letters from mortgage brokers and lenders offering you a loan. This loan will pay off your current loan and possibly give you some money back. Nothing wrong with that so far, right?

The thing they don't tell you is that these foreclosure bailout loans are a gold mine for the lender. These loans are known as asset loans, because they are based on the value of the property and not on your credit score. Not only do they carry exorbitant interest rates, but they are also padded with additional fees referred to as "points". Each point is equal to 1% of the loan amount and some lenders will charge up to 4 points.

What will happen is your new loan amount and corresponding monthly payment will be significantly higher than your current payment. So, you'll stop the foreclosure process for the moment, but it won't be long until you're back where you started. The only thing that'll change is you'll be a lot deeper in debt.

Let's illustrate this. Let's say you owe $100,000 on a house worth $200,000. The lender would lend you up to 65% of this value or $130,000. However, it would charge you $5200 (4 points) to do the loan and another $10,000 in closing costs. If you also subtract the $100,000 you owe plus all the closing costs and lender fees you'd end up with $14,800 coming back to you.

Now, instead of owing $100,000 on the house, you'd owe $130,000 and only have $14,000 in your hands. How long will that last you when you're interest rate is at 12% or higher.

Although, there are cases when these loans may be able to help you out, in most cases you'd be better off just selling your house. If you do go for this type of loan make sure you get these questions answered:

What will be my new loan amount?
What will be my total monthly payment?
What are the total charges for the loan?
Will I get money back, if so how much?
Will I be able to refinance this loan without paying a penalty?

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