The Ten Most Common Mortgage Mistakes, and How to Avoid Them

Comments(0) By Mike Miller •May 23rd, 2008

ONE: Failing to determine which specific type of loan is best for you.

TWO: Not understanding the dramatic differences between lenders.

THREE: Failing to understand the cost of a “no-cost” loan.

FOUR: Believing everything you hear and read.

FIVE: Locking in your rate at the worst possible moment.

SIX: Refinancing your loan when you really don’t need to.

SEVEN: Not refinancing when you really should.

EIGHT: Obtaining an ARM when you’re not real clear about the details.

NINE: Failing to understand the valuable role a mortgage broker plays.

TEN: Choosing the wrong person to assist you with your decision.

MORTGAGE MISTAKE ONE

Failing to determine which specific type of loan is best for you.

I’ve had many people come to me for a loan who were absolutely sure that they wanted a fixed rate, but ended up choosing an Adjustable Rate Mortgage (ARM). While some who wanted an ARM ended up choosing a fixed rate mortgage loan.

This was not because I changed their minds, rather I asked them certain questions which helped to focus their thinking. By clearly explaining different loan options that they were not aware of, I enabled my borrowers to change their own minds, in turn making the right loan choice for themselves.

There are two things you must do before you can choose the right loan:

You must become educated about your loan options.

You must make a guess at how long you expect to be in your home.

OPTIONS- Current loan options are constantly changing. Almost every lender, both new and old, tries to put a new “twist” in their loan product to make it more appealing to consumers. But the different options can be confusing without the proper explanations. When you are looking at your options, make sure you have a knowledgeable advisor who you trust to help you understand their subtle differences.

LENGTH OF TIME- Guessing how long you will be in a home is no easy task. Rarely is someone able to say exactly how long they will be in their home. The best you can do is to come up with a range of years. Many things need to be considered when deciding (upward mobility, scaling down, marriages, births, changing lifestyles, job changes etc.). Put some thought into this step because it’s one of the most important aspects of choosing the right loan.

In the past, California homeowners paid off their loans every three to five years. Notice I said paid off their loans, not sold their homes. There are many reasons to refinance a mortgage besides getting a lower interest rate: changing from fixed to adjustable (for lower payments), adjustable to fixed (for more security), buying out co-owners, pulling out equity, consolidating loans/debt etc. You may refinance your home even though you don’t expect to at this time.

MORTGAGE MISTAKE TWO

Not understanding the dramatic differences between lenders.

It’s important to know what type of lenders provide which type of financing alternatives. Here is a brief description of the standard lenders:

SAVINGS & LOANS

In the past, Savings & Loans (S&L’s) have played a major role in the home financing arena. In theory, the deposits that they receive from the “savings” customers are lent to the “loan” customers. A few big S&L’s still operate this way, but most do not.

Many S&L’s “sell” loans into the secondary market instead of keeping them in their “portfolio” (this is a big difference, and I will explain it in more detail under mortgage bankers). S&L’s make more Adjustable Rate Mortgages (ARM’s), compared to fixed rate mortgages. In fact, some S&L’s pay their Loan Officers moreif the borrower chooses one of the company’s ARM’s (so you need to be careful who you ask for advice).

The ability to “portfolio” loans gives S&L’s greater flexibility when making the loan decisions.

MORTGAGE BANKERS

A mortgage banker is a lender whose sole purpose is to make mortgage loans. The names of the mortgage bankers are usually not as well known as other lenders, but this does not mean that they are not as good. Since they are specialists at making home loans, they usually have the best rates, and the quickest processing time.

Mortgage bankers rarely “keep” loans in a portfolio. Instead they “sell” them into the open marketplace, and retain the right to collect your payments for a fee from the new “owner” of the loans (the investor). The rights to collect your payment may be sold to another company in the future, but it won’t affect the terms of your loan in any way.

Mortgage bankers are known for having loans that are sometimes harder to qualify for because they must meet the “secondary market” guidelines. If you can qualify with a mortgage banker, you’ll find that it’s worth the extra scrutiny, because it will allow you to obtain a fixed rate with very good terms..

COMMERCIAL BANKS

When commercial banks make home loans they are usually sold into the secondary market, but the rates are rarely as low as those offered through mortgage bankers. I think that the large overhead that these banks have translates to higher rates for consumers.

There are some banks that occasionally have very good “special ” promotions, but overall, because they try to do everything (checking, savings, first and second mortgages, lines of credit, investment services, not to mention commercial account services), they rarely offer the most competitive mortgages.

MORTGAGE MISTAKE THREE

Failing to understand the cost of a “no-cost” loan.

You have probably heard about “no-cost” loans. Just as you know that there is no such thing as a free lunch, there is also no such thing as a no-cost loan.

It’s true a “no cost” loan does not have the typical closing costs associated with the financing process. The lender is covering the inherent cost in exchange for your acceptance of a higher interest rate from them. “Higher than what?” you may ask. Higher than the rate you could get from them if you paid your own closing costs”.

But is a no-cost loan really the best loan for you? That depends. On a monthly basis, the difference of a slightly higher rate may not seem that great. But you really need to analyze the cost difference over the length of time that you plan on having the loan (after all that’s how the lender looks at it).

Usually it will take between two to four years for you to “break even” when you pay your own closing costs. You can see if you are going to be in your home longer than that, you will probably want to pay the fees yourself.

What about paying “points”?

“Points” is the term used to describe what is technically know as the loan origination fee (it is a percentage of the loan amount charged as a fee). In a refinance transaction it usually does not benefit you to pay points, but if you intend on being in the house for ten or more years it may.

When you are buying a home, it’s slightly different because of the tax ramifications of paying points. The fee is technically considered prepaid interest, so it is tax deductible. An analysis should be done in order to determine if it makes sense to pay points and get a lower interest rate.

MORTGAGE MISTAKE FOUR

Believing everything you hear and read.

The mortgage version of “bait & switch” occurs when you’re calling around shopping for the best rate, and someone quotes you a rate that is unobtainable (just so that you go to them for the loan). Once you’re in process, they tell you their rates have gone up, and when you call other lenders to check out what they say, you find that other lenders are quoting the same rate that your lender is now quoting. So you end up staying with the same lender because your loan is approved with them.

Remember, when you’re shopping around, the “high” rates that you may be quoted, could be the true rates actually available.

As far as the actual lenders are concerned, I personally have not heard of any practicing bait and switch. However, like in any industry, there are bound to be a few “bad apples”. It’s your responsibility to carefully choose your mortgage specialist. Spend at least the time and energy you would when searching for any financial advisor, doctor, or attorney.

The worst thing you could do is look in the paper, pick up the phone, and make an appointment.

Here’s why: 1. The rate information that you read is old news, as rates have changed many times before the paper is even printed. 2. Some lenders quote a super low rate just to get you to call, but have many reasons as to why that rate is not available for your situation. 3. You have no idea if the loan officer you are talking to is reputable, let alone if they know what they are doing!

A great deal of fraud occurs because there is not much advertising regulation for the lending industry at this time. So if someone wants to be dishonest, there is not much to stop them. You may have heard of cases of bait and switch, or even outright thievery by some companies.

Please, before you even consider filling out a loan application ask these questions:

1. How long have you been a loan officer?

2. How many lenders do you work with?

3. Give me at least three Realtor references!

Realtors know who the most honest and the most experienced brokers are. By taking these simple steps you will improve your odds of enjoying your experience.

MORTGAGE MISTAKE FIVE

Locking in your rate at the worst possible moment.

Whether or not you should “lock in” (to guarantee your rate at application, prior to being approved by the lender), or “float” (determine you rate after you are approved for the loan), is a common question.

The answer depends on what rates are currently doing. Here are some general rules:

*Rates trend down… FLOAT

*Rates mostly stable… FLOAT

*Rates going up… LOCK IN

Why would you want to float the rate if rates are mostly stable? Because locking in a loan usually means accepting a slightly higher interest rate for that “privilege” of locking. In fact, the longer the term you wish to lock, the higher the rate will be. This is because lenders need to “hedge their bets” against a possible rise in interest rates. A higher rate ensures the lender the correct profit in the future if rates move up. And what happens if rates don’t go up? You guessed it, most of the time you still have to take the higher rate because you “locked in”.

Strategy: Only lock in if you think rates are moving up substantially.

Example- Lets say that you can lock in the rate for 30 days when you apply for the loan. But the rate is .25% higher than the “short term” rate (the rate you could get today if you were already approved). Only if you feel rates will move up more than .25% should you lock in.

If you don’t lock in, the rates would have to move up more than .25% before you would be any worse off. If the rates don’t rise by .25%, but stayed where they were (or even went down!), you would be much better off.

Bottom line: You don’t want to pay a rate premium to lock in if rates are not going up. This simple concept is one that many loan professionals have never grasped.

MORTGAGE MISTAKE SIX

Not refinancing when you really should.

Forget all the rules of thumb. The only way to decide when the best time is for you to refinance, is to find out how much you can save, how much it will cost, and then if it’s worth it to you.

Fifty dollars savings per month, which is six hundred dollars a year, may not seem like enough to some people to go through the process. Some people like to wait, and see if they could save more. But when rates move up instead of down, and the annual savings go down to four hundred, then the six hundred dollar savings seems pretty good.

I always recommend to do what makes sense to a person whenever they can do it. In the above example, for the approximate four hours of effort (including loan education, the decision, application, processing, closing process) they would be receiving the equivalent of “free” fire insurance (the $600 savings) for as long as they have the loan.

MORTGAGE MISTAKE SEVEN

Refinancing your home when you really don’t need to.

There are several ways for a homeowner to save a substantial amount of interest without refinancing. Here’s how it’s done: instead of lowering the rate of interest that you pay, there are ways to lower the amount of interest you pay over time. This concept is not new, nor is it difficult to understand or execute. But because you must be fairly well disciplined, few people make the effort to do it.

It’s called prepayment. All you have to do is prepay just a little bit of principal every month, and the savings can be substantial. For example, take a $100,000, 30 year fixed rate loan with an interest rate of 9%. The normal payment is $804. But, if you include only $75 more with your regular payment, you will pay off your loan in 21.3 years. This saves you over 103 payments of $804 ($82,812), and that’s a lot of money!

Other strategies to pay less interest on your loan:

* pay your loan at a 15 year payment schedule (or 10, 20, or whatever you want), call me and I’ll calculate your payment.

* make one extra monthly payment per year

* send in one twelfth of your regular monthly payment as an extra payment per month

* obtain a bi-weekly loan

A BIG word of caution, setting up a bi-weekly payment plan with a company other than the actual lender can be very risky. I know who does it best.

MORTGAGE MISTAKE EIGHT

Obtaining an ARM when you’re not real clear about the details.

Obviously it’s important that you understand what you are getting into. The problem is, most loan officers can’t explain things clearly..

Many people believe that lenders make more profit on ARM’s, but the truth is that most of the time they don’t. This is because of how ARM’s work. Having an “adjustable” rate means that it is tied to an “index”. As the index moves up and down so does the interest rate. The index is primarily an indicator of the lender’s cost for the money that they in turn lend to consumers. So when your rate goes up, it is usually just a reflection of the lenders cost going up (for a more detailed look at ARM’s see the consumers guide to ARM’s available from my office.

A concept that many people never consider:

Lenders have many different loan options, but they are all designed to give them the same approximate interest “yield”. The cost to borrow money is about the same everywhere, and with rare exceptions no one company is lending money at a considerably lower rate than anyone else. The key is to use a loan that has been designed in a way that works best for your particular situation.

Lenders “price” their loans in order to get a certain return for their investment. They do this by looking at statistics which show them the average length of time that homeowners keep a loan on their homes.

If you have never had an ARM before you may wonder why anyone would want an ARM in the first place. Most people who choose an ARM do so because the lender gives a “discounted” rate the first year (a rate at less than the true going rate). Lenders do this in exchange for the risk that the borrower is sharing with them (the risk that rates may go up). This makes ARM’s easier to qualify for, initially gives a borrower better cash flow, and if held for only a few years, an ARM could give a borrower a lower overall interest cost.

MORTGAGE MISTAKE NINE

Failing to understand the valuable role a mortgage broker plays.

Why would you want to go through a “third party” to obtain mortgage financing? Don’t you end up paying more? Isn’t there a loss of control? Why not just go to your own bank? Those are all very good questions, and they deserve good answers.

When using a mortgage broker, your one application is like applying with dozens of lenders at the same time. We gather all the paperwork just like a bank would, and once you decide which specific type of loan you want, we submit the loan to the lender that offers the very best terms. It’s a huge times saver, plus you get the benefit of an independent neutral expert.

Here’s your option: call all around town to the banks, speak with all kinds of people some knowledgeable and some not. Try and make sense of all the information you’ve been given, decide who you think has the lowest rate, apply for the loan, have the bank process the loan, and after weeks of waiting, maybe the bank will approve your loan.

A very common problem is, you find out that the bank you applied for a loan with no longer has the lowest rate. Another bank does, so now to get the lowest rate you have to fill out another application, pay for another appraisal, wait another few weeks, etc. The “one application/ many lender” concept is a far easier, and smarter way to shop for a loan.

Remember a broker works with lenders at a “wholesale” level. This means that you are not going to pay more for the loan that they are providing. Actually, available rates through a broker can be lower than going direct.

Example: let’s say that a bank has a rate of 5.5% with 1.5 points. I take your loan directly to the same banks underwriter at the “wholesale” level. You would get the same rate, pay the same points, but I would get a fee from the bank for bringing them your loan.

It’s actually cheaper for the bank to pay a fee to me than to have the overhead associated with a retail operation. This is because I act as the lenders advertising department, sales staff, processing department and everything else associated with loan origination.

You will also have a faster overall process working with me versus going direct. When you go directly to a bank you may be just another customer, but to me you are a valued client. I will do everything possible to make you so satisfied with my service that you will never consider a mortgage decision without first consulting me. This is what I call cultivating a “client for life”.

MORTGAGE MISTAKE TEN

Choosing the wrong person to assist you through the most important financial decision in your life.

As you may have guessed by now, one of the most important roles that a mortgage broker plays is that of an educator. You need to understand your options, know how they differ from one another, and find out how they will affect you in the long run.

When choosing a broker, there are some basic things you should look for. Experience, education, and written references from clients are all basic things to ask for. That’s right, ASK!!! Don’t assume that because someone is in the loan business that they are qualified to assist you in the most important financial decision of your life.

EDUCATION

* Graduate 1987, The American School of Mortgage Banking, the largest school of it’s type in the nation.

*Three times the required continuing education established by the California Department of Real Estate.

*Specialized mortgage training from The Duncan Group, Dennis Black Enterprises, Jack Davis & Associates, and many other industry organizations.

EXPERIENCE

*Twenty two years as a residential mortgage loan officer

*Over $1,250,000,000 worth of homes financed

*Hundreds of families assisted every year.

*Realtors sell over $100,000,000 in real estate annually with our assistance.

*Producer & distributor of one of the first consumer oriented mortgage newsletters in the state (since 1987), and author of www.DanvilleMortgageBlog.com

REFERENCES

Dozens of written testimonial letters are on line for your review. These letters are from top Realtors, past clients (both purchase and refinance), title company escrow officers, wholesale lenders, very nervous first time buyers, and even competitors who I’ve helped in the past.

BOTTOM LINE

With my loan service you’ll receive more information and more options than any bank. This ensures you will obtain the right loan for your needs at a very competitive rate. Most importantly, my guaranteed loan service will provide you with the peace of mind you desire.

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Filed Under: Borrower Tips