High-Cost Home Loans: The Federal Triggers and Protections

Published by the Modern Lending Solutions editorial team. Last reviewed: October 30, 2026.

Short answer: a loan or credit line secured by the home you live in is a “high-cost mortgage” under federal law if its APR, its points and fees, or its prepayment penalty pass set limits. If it is, the lender must give you extra disclosures at least three business days before closing and get proof that you met with a counselor HUD has cleared to give this counseling, and the loan may not include a balloon payment (with some exceptions), a prepayment penalty, a higher rate after default, or a late fee above 4 percent of the payment. This page covers federal law only; other rules may apply where you live. It is general information, not legal or financial advice.

Which loans the rule covers

The rule covers “any consumer credit transaction that is secured by the consumer’s principal dwelling”, both closed-end loans and open-end credit such as a HELOC (12 CFR 1026.32(a)(1), eCFR, text up to date as of October 28, 2026, read October 30, 2026). It does not apply to (1026.32(a)(2)):

A reverse mortgage;
A loan to finance the initial construction of a home;
A loan where a housing finance agency is the creditor; or
A loan under the U.S. Department of Agriculture’s Rural Development Section 502 Direct Loan Program.

The law behind the rule is the Home Ownership and Equity Protection Act, part of the Truth in Lending Act; the loan limits are in 15 U.S.C. 1639 (Cornell LII, read October 30, 2026).

The three triggers

A loan is a high-cost mortgage if any one of these is true (1026.32(a)(1)):

Trigger	Limit
APR, first-lien loan	More than 6.5 percentage points above the average prime offer rate for a comparable loan (8.5 points if the home is personal property, such as some manufactured homes, and the loan is under $50,000).
APR, second-lien loan	More than 8.5 percentage points above the average prime offer rate.
Points and fees, larger loans	More than 5 percent of the total loan amount, when the loan amount is $27,592 or more in 2026.
Points and fees, smaller loans	More than the lesser of 8 percent of the total loan amount or $1,380, when the loan amount is under $27,592 in 2026.
Prepayment penalty	The contract lets the lender charge one more than 36 months after closing, or penalties that can total more than 2 percent of the amount prepaid.

The dollar figures change each January 1 with the Consumer Price Index. The 2026 figures, $27,592 and $1,380, are in the official comments (comments 32(a)(1)(ii)-1 and -3, eCFR) and in the yearly adjustment notice (Federal Register, effective January 1, 2026, read October 30, 2026). For a loan closed in another year, check that year’s figures. The comments say the lender picks the limit by the face amount of the note (or the credit limit for a HELOC), but applies the percentage to the “total loan amount” as the rule defines it, which can differ from the face amount (comment 32(a)(1)(ii)-3).

The average prime offer rate is an APR derived from rates, points and other pricing terms offered by a representative sample of lenders on low-risk mortgages (1026.35(a)(2)); for a variable rate, the APR used for the test is figured from the fully indexed rate or the maximum rate, as the rule sets out (1026.32(a)(3)). Points and fees include charges in the finance charge other than interest, plus loan originator pay and some other items, with exclusions (1026.32(b)(1)). To find these figures on your papers, see how to read a loan disclosure.

Testing the points and fees, only for the math

This example is only for the math, and all figures are example figures, not amounts from any lender. Each example takes the total loan amount and the points and fees as given; the lender figures both under the rule.

Example	Limit in 2026	Points and fees	Result
Loan amount and total loan amount $40,000.00	5% of $40,000.00 = $2,000.00	$2,400.00	$2,400.00 is $400.00 over the limit: high-cost
Loan amount and total loan amount $15,000.00	Lesser of 8% ($1,200.00) or $1,380.00 = $1,200.00	$1,300.00	$1,300.00 is $100.00 over the limit: high-cost

What a high-cost mortgage may not include

Under 1026.32(d), the loan may not have:

A balloon payment, meaning a scheduled payment more than two times a regular payment, except for a schedule adjusted to seasonal or irregular income, a bridge loan of 12 months or less to buy or build your new home, and some loans from smaller lenders that meet the qualified mortgage conditions in 1026.43 (1026.32(d)(1)). For a HELOC, the jump in payment when the draw period ends does not count.
Payments that make the balance go up (negative amortization) (1026.32(d)(2)).
More than two payments taken in advance from the loan money (1026.32(d)(3)).
A higher interest rate after default (1026.32(d)(4)).
A prepayment penalty (1026.32(d)(6)).
A clause letting the lender demand the whole balance early, except for fraud or material misrepresentation, a payment default, or an act or failure to act that harms the lender’s security in the home (1026.32(d)(8)).

For how balloon payments and prepayment penalties work on other loans, see balloon payment loans and personal loan prepayment penalties.

What the lender may not do

Rule	Section
No closing without written proof that you got counseling on the loan from a counselor HUD has cleared to give it, who is not employed by or affiliated with the lender, after you get the early disclosures	1026.34(a)(5)
No steering you to a particular counselor; the lender may pay the counselor, but not on the condition that the loan closes	1026.34(a)(5)(v), (vi)
No financing the points and fees into the loan	1026.34(a)(10)
No fee to modify, renew, extend or amend the loan, or to defer a payment	1026.34(a)(7)
No fee for a payoff statement, except a processing fee for fax or courier	1026.34(a)(9)
No recommending that you default on a loan this one will refinance	1026.34(a)(6)
No refinancing you into another high-cost mortgage within one year unless it is in your interest	1026.34(a)(3)
No paying a home improvement contractor directly from the loan, except by a check to you or to you and the contractor jointly, or through an escrow agent you agree to in writing	1026.34(a)(1)
No splitting a loan or structuring it to evade these rules	1026.34(b)

Sources: 12 CFR 1026.34 (eCFR). For a closed-end high-cost mortgage the lender must also make a good faith determination that you can repay under 1026.43, and for a HELOC it must check your income, assets and debts before opening the line (1026.34(a)(4)). To look for a housing counselor, use the CFPB’s search (CFPB).

Late fees, only for the math

A late fee must be allowed in the contract, may not exceed 4 percent of the past-due payment, may be charged only once per late payment, and only if the payment is not received within 15 days of the due date (30 days if interest is paid in advance) (1026.34(a)(8)). This example is only for the math: on an example monthly payment of $1,200.00, the highest late fee allowed is 4% of $1,200.00 = $48.00.

The disclosures you get first

At least three business days before closing or opening the account, the lender must give you a separate high-cost disclosure (12 CFR 1026.31(c)(1), eCFR). It must show the APR, the regular payment and any balloon, for a variable rate the highest payment possible, and the amount borrowed or credit limit, plus this notice (1026.32(c)):

“You are not required to complete this agreement merely because you have received these disclosures or have signed a loan application. If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obligations under the loan.”

If the lender changes a term so the disclosure is no longer accurate, it must give you new disclosures (1026.31(c)(1)(i)).

If the loan is sold

A lender that sells a high-cost mortgage must give the buyer a notice that the loan is subject to special rules, and that buyers “could be liable for all claims and defenses with respect to the mortgage that the consumer could assert against the creditor” (1026.34(a)(2)). If you think a lender did not follow these rules, ask a lawyer; you can look for legal aid through the Legal Services Corporation and complain at consumerfinance.gov/complaint.

Related guides

A home equity loan, HELOC or refinance with a new lender also comes with a three-day right to cancel; see right to cancel a home equity loan. To compare borrowing against your home with an unsecured loan, see HELOC vs personal loan and cash-out refinance vs personal loan. If you are behind on a mortgage, see behind on mortgage payments.

Questions to ask the lender

Is this loan a high-cost mortgage under 12 CFR 1026.32, and which test did you use?
What are the APR, the average prime offer rate you compared it with, and the total points and fees?
Which charges did you count in points and fees, and which did you leave out?
Does the contract have a balloon payment, a prepayment penalty or a late fee, and on what terms?
When will I get the high-cost disclosure, and how do I find a counselor?

Checklist

Three triggers: APR, points and fees, or prepayment penalty terms.
In 2026, the points-and-fees limit is 5% for a loan amount of $27,592 or more, and the lesser of 8% or $1,380 below that.
A high-cost mortgage: no prepayment penalty, no higher rate after default, a balloon only in narrow cases.
Late fee: no more than 4% of the payment, after 15 days.
Counseling from a counselor HUD has cleared, before closing, and the disclosure at least three business days before.

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Sources

Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.

When a Home Loan Counts as High-Cost, and What Federal Law Then Bans