Given how easy it is to get skinned in a mortgage deal, it’s surprising that anyone would buy a home, says Liz Pulliam Weston, personal finance columnist for MSN Money.
But we buy, and then we refinance, and we refinance again. Our ignorance of how the mortgage process works and the many ways that mortgage professionals manipulate the system in their favor leads many of us to pay much more than we should.
Taking Ms. Weston’s comments into account, here is the key information from a former senior loan officer that mortgage lenders don’t want borrowers to know:
1. Not knowing what mortgage payments the borrower can (and cannot) negotiate. Or how the lender actually makes money from you. Without this understanding, the borrower could overspend thousands of dollars. . . in mere seconds. Remember, the loan officer is different than your friendly bank teller. The bank teller probably gets paid salary be courteous and helpful. The job of the loan officer is to earn money and you will probably be paid in commission.
2. Choose and trust the first loan officer the borrower interviews. Just like you probably wouldn’t say yes if someone asked you to marry them on your first date. You are looking at the largest single investment commitment you have ever made and one that will probably outlast most marriages.
3. Using an adjustable-rate interest-only or “payment option” loan primarily to qualify for a home that is more expensive than you normally could afford. In today’s market of slowing appreciation and falling prices, such a loan could leave you with a mortgage balance that could be greater than the value of your home. And if the payment adjusts for a below-market interest rate, you may be paying hundreds or even thousands of dollars more per month or can no longer afford the mortgage. At this point, your builder or loan will have little interest. They have already made their money. But you may be facing foreclosure and the loss of your biggest investment.
4. Thinking that the interest rate is always the main thing. Most so-called savvy mortgage buyers think they should call to compare prices. And rate envy is common, especially among male borrowers. But what closing costs will you have to pay to get that fabulous advertised rate? Make comparisons not only of the interest rate but of all the costs of the loan.
5. Failing to compare the final fees listed in the closing documents with the initial estimates to prevent the lender from packaging the loan with additional charges without the knowledge of the borrower. It is relatively easy for the lender to do this because there will be a ream of forms that you will need to review and sign at closing. A deceptive closing agent can also use various tactics to distract you from inflated numbers so you won’t notice.
6. Not knowing if the mortgage has a prepayment penalty – until it’s too late. If not, you could find yourself in a Catch-22: You may need to refinance the mortgage in order to make the monthly payment, but you may not be able to pay the prepayment penalty in order to refinance!
7. Thinking that renting is always a waste of money. At least in the short term, it can cost thousands less to rent. For example, don’t buy a starter home. If you’ll be living in the area for less than five years or aren’t sure how long you’ll be in your current job or marital status, you could save thousands by staying in your apartment. Only the closing costs of a house can be $1,500 to $2,500. You may also be looking at a 6% realtor fee to sell your home. We have a $200,000 house that is $12,000. And the moving truck hasn’t even arrived at your doorstep yet!
8. The borrower does not know if he is paying a final yield spread or a service release premium. These are the fees paid to brokers and loan officers for raising the interest rate on borrowers.
9. Paying for expensive mortgage life insurance, credit insurance, or other lender add-ons to increase the amount of kickbacks the lender can take from various vendors.
10. Paying hundreds of dollars to have a company set up a bi-weekly mortgage payment plan, something the borrower can usually do themselves, for free.