Who wants a larger payment versus a smaller mortgage payment? However, the desire for the lowest monthly payment and the cheapest mortgage interest rate can be blinding to some very important aspects of the loan and loan process. That said, most of you reading this article are still probably going to go shopping for the lowest rate and payment with the least amount of money out of your pocket.
If so, here are few things to keep your eye on while you determine what loan program you are going to get, who you are going to get it from, and what price you are willing to pay for it. Always remember, a mortgage is more than “just a payment.” It is, in fact, an entire package of obligations (and benefits) that are, most likely, going to be with you for a long time. If you get into a loan program or variable interest rate situation that isn’t right for you, it could cost your home, your good credit and a lot of money. So beware.
Before we keep going, I’d like to give you the 5 minute rule. If you are being offered something that seems too good to be true give yourself 5 minutes to think about it before you act. Make sure that before you proceed forward with spending any money on an application fee, or an appraisal that you get something in your hands to look at from your loan officer. Even it is their business card. With their business card, you can check to make sure that they are licensed or work for a licensed mortgage company.
Features of a Loan Program to Watch Out For
High Loan Closing Costs and Fees – Unnecessary fees or otherwise known as “junk fees” can often be masked by the promise of low monthly payments.
Remember this rule of thumb: the Annual Percentage Rate APR will be higher if you are being charged these fees. If you get a good faith estimate GFE with these fees and you do not want to pay them, ask for another good faith estimate without the fees and compare the APR’s. If they are the same, then your paperwork isn’t being filled out correctly by your loan officer. At this point you have several choices: ask them to correct the APR and give you new GFE’s or look for another loan officer.
Interest Rate Guarantee – It is a risky business for anyone to “guarantee” an interest rate to you. Here’s why. If you go beyond your interest rate lock period for whatever reason, and interest rates go up either you or your loan officer has to pay some money to keep the same rate (they might try to get you to pay for it in the form of points). Some mortgage companies will honor the rate lock no matter what, but it will cost them some money so pay attention to your fees etc. in case someone tries to slip in some “last” minute fees at the closing table.
Discount points, Origination fees – Loan discount points, loan origination fees, mortgage broker fees etc. are all fees that can find their way on your loan documents at closing. See our 3 part article series on Expenses During the Loan Process Explained.
Adjustable Rate Mortgages With Short Adjustment Periods – Low payments with these types of loans last for a short period of time. Typically ARM’s are fixed for three, five, or seven years, though some trickier loans have rates that adjust in as little as a month or two. If interest rates are higher than when you originally got the loan then you can bet your interest rate is going to go up at the end of your fixed period.
This is happening to many mortgages following 2007 mortgage industry problems. If you are going to take this loan program make sure you know what you plan on doing at the end of the fixed period. Counting on being able to refinance is not a good reason to take a loan. Many people who got these ARM mortgages with short fixed periods, who are having problems were counting on refinancing their mortgages. However as housing prices began to fall, and in many places, continue to fall these people are stuck because they cannot refinance. Some of these folks were also stuck with not being able to refinance early because of pre-payment penalties. No one has to ever take a pre-payment penalty.
Negative Amortization – Although as of this article being written, March 2008, this type of loan has all but been discontinued you should know about how it is offered. The red flag to stay away from is advertising that offers interest rates at 1%, or 1.25% or some other “too good to be true” interest rate. If you are offered this kind of loan program my suggestion is to stay away from it, or ask for other options. This loan program generally offers a very low minimum payment where it is possible that your monthly payment does not even cover the interest you are accruing. If this is the case, the amount you owe on the loan increases with each minimum payment where the interest due is greater. This situation is called negative amortization.
None of these loans are bad for everyone all of the time. Some of these loans are advantageous under certain situations. An adjustable-rate mortgage, for example, could work for someone who is flipping a house or planning to move within a short period of time. Either way, make sure to consider all features and terms of the loan before signing on. Also, make sure you understand everything. The wrong time to admit not understanding something is after you got the loan.
Written by Gary Nordhoff. Gary is a business and internet marketing consultant, a real estate investor, and a proud homeowner. This Article is designed to be of general interest and should not be considered legal advice. The specific information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal adviser.
