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What is a High-Cost Mortgage Loan
In residential mortgage lending, what do they mean that a mortgage loan does not pass high-cost? What is a high-cost mortgage loan.
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2 Replies
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A high-cost mortgage loan, also known as a higher-priced mortgage loan (HPML), is a type of mortgage that exceeds certain annual percentage rate (APR) or points-and-fees thresholds set by the federal government.
The specific criteria that define a high-cost mortgage loan are:
- Annual Percentage Rate (APR) Threshold:<ul depth=”1″>
- For most mortgages, if the APR exceeds the Average Prime Offer Rate (APOR) for a comparable transaction by 1.5 percentage points or more for first-lien loans, or 3.5 percentage points or more for subordinate-lien loans.
- Points and Fees Threshold:<ul depth=”1″>
- If the total points and fees paid by the borrower exceed certain percentages of the loan amount, which vary based on the loan amount. For example, for loans of $110,260 or more, the threshold is 5% of the total loan amount.
The points and fees include charges such as origination fees, underwriting fees, mortgage broker fees, and certain other third-party charges.
High-cost mortgages are subject to stricter regulations and consumer protections under the Truth in Lending Act (TILA) and the Home Ownership and Equity Protection Act (HOEPA). These regulations aim to protect borrowers from predatory lending practices and ensure they receive clear disclosures about the loan’s terms and costs.
Some of the key requirements and restrictions for high-cost mortgages include:
- Prohibited Loan Features: Lenders cannot include certain risky features like negative amortization, balloon payments, or prepayment penalties.
- Counseling Requirement: Borrowers must receive pre-loan counseling from a HUD-approved counselor.
- Enhanced Disclosures: Lenders must provide specialized disclosures detailing the APR, amount borrowed, and total loan costs.
- Ability-to-Repay Requirement: Lenders must carefully assess the borrower’s ability to repay the loan, including verifying income, assets, and obligations.
It’s important to note that while high-cost mortgages can provide access to credit for borrowers who may not qualify for traditional loans, they often come with higher interest rates, fees, and stricter requirements. Borrowers should carefully review and understand the terms and costs associated with these loans before proceeding.
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A high-cost mortgage loan, also known as a Section 32 mortgage or a high-priced mortgage loan, is a type of loan that carries higher fees and interest rates compared to other loans offered to borrowers with similar credit profiles. These loans are typically designed for borrowers with weaker credit histories or limited financial resources.
Key features of high-cost mortgage loans may include:
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High Interest Rates: These loans often come with interest rates significantly above the prevailing market rates.
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High Fees: Borrowers may be charged high origination fees, broker fees, or other closing costs, which can significantly increase the overall cost of the loan.
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Prepayment Penalties: Some high-cost mortgage loans impose penalties if the borrower pays off the loan early.
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Balloon Payments: Some loans may have a large final payment, known as a balloon payment, due at the end of the loan term, which can catch borrowers off guard and lead to financial strain.
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Mandatory Arbitration Clauses: These loans may include clauses that require borrowers to resolve disputes through arbitration rather than through the court system, potentially limiting legal recourse for borrowers.
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Limited Protections: High-cost mortgage loans may offer fewer consumer protections compared to other types of mortgages, leaving borrowers vulnerable to predatory lending practices.
High-cost mortgage loans are typically subject to additional regulatory scrutiny and may be subject to specific requirements and restrictions under various laws, such as the Home Ownership and Equity Protection Act (HOEPA) in the United States. These regulations aim to protect consumers from abusive lending practices and ensure that borrowers are aware of the risks associated with these types of loans.
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