EchoBay Expert: After applying for a bad credit refinancing loan with a lender, my neighbor, who is a real estate agent, told me my loan should be classified as a "Section 32 Mortgage" under the Truth in Lending Act. Does this mean I'll get a lower rate?
Loyal Reader: No, it does not mean that you will get a lower rate. A Section 32 Mortgage is a high rate, high fee loan that activates the Truth in Lending Act. The rules apply only to refinancing or home equity loans. With a first lien loan, such as in your situation, if the APR exceeds the rate on Treasury securities by more than eight points, the loan is classified as a Section 32 Mortgage.
If it is for a second lien, the APR must exceed the rate on Treasury securities by more than 10 points. It also applies if fees exceed 8% of the loan amount. If this is the case, the lender is required to give the borrower certain disclosures. The first states that the borrower has the right not to take out the loan even after the application is completed.
You have three days to decide whether to sign after your receive the disclosures for your loan. The second required disclosure informs the borrower that if you do not make the required payments, you can lose your home as well as any money you have put into it.
The final disclosure requires the lender to disclose the APR, the payment amount and the loan amount. If it is a variable rate loan, it must also state that the payment may change and give a maximum payment amount.
Unfortunately, Section 32 mortgages do not guarantee a lower rate but it does require the lender to be upfront about all fees and your interest rate.