You get home and find your mailbox overflowing with mail, only to find it is not because you are particularly popular, but because every mortgage company in the nation is soliciting your business. It’s everywhere you go – advertisements on the radio, billboards, your TV – non-stop advertisements claiming they can save you thousands if you just refinance with them. You may ask yourself, now that rates have gone up, why haven’t these ads gone away? Well here are a few tips to help you spot the “catch” in these so-called deals and opportunities.

 

1)     When you are offered a rate that seems to great to pass up, you may want to take a second look at the type of loan they are offering. Many of the lenders out there are promoting an Option ARM, which is a monthly adjustable mortgage that gives the borrower several options when it comes to making payments. One of those options is to pay a minimum payment that carries a negative amortization. A negative amortization (“Neg-Am”) is when the minimum payment doesn’t cover the interest charged, thereby increasing the balance of your loan every month. This great rate you are getting offered is what is known as a “teaser” rate. It is all you are required to pay, but not how much you are being charged.

 

2)     Beware of the ads offering you an exceptionally low payment for a high loan amount. Again, this is usually possible by way of the “Neg-Am” loan. You are paying very little out of your pocket every month, but you are being charged more than that payment. It’s similar to your credit cards. If you pay the minimum say $20 payment, you are still getting charged the 18% interest on the balance, and next month, your balance will be that much higher.

 

3)     Low-cost and no-cost loans make people think they are getting something for nothing. Sorry to burst your bubble, but lenders are not truly waiving those fees. Instead they will give you a slightly higher rate so that they get what is called a Yield Spread Premium (YSP), which is like a kickback. That slightly higher interest rate could end up costing you thousands more over the long run than if you just paid the fees up front. Everyone who works on your loan is going to get paid one of three ways…either by you in upfront fees, by the lender YSP created by charging you a higher interest rate, or a combination of the two.

 

4)     Look at the APR. The Annual Percentage Rate (APR) is supposed to be the overall interest with any closing costs associated with obtaining the loan factored in. The higher the APR is over the loan’s interest rate, the higher the fees are for doing that loan. The APR will almost always be higher than your interest rate, but if there is a huge discrepancy, you are really paying a lot more than you bargained for. Read the fine print! 

 

5)     A monthly payment can also be lowered by having a longer amortization period. The amortization period is the amount of time you have to pay off the loan. Now lenders are offering 40 and even 50 year amortization periods. To give you an idea of how much this affects your payment, if you have a $300,000 loan amount with a 6.5% interest rate, the payment would be $1,896 on a 30 year loan. If your loan was extended to 40 years, your payment would be $1,756. If the same loan were amortized over 50 years, your payment would only be $1691. As you can see, the payments seem more attractive, when really you are just spreading your payments out over a longer period of time, which also means you are paying interest for a lot longer – more money for the lender.

 

6)     Quotes without questions. If you call up a lender, and ask them what their rate is, if they quote you a rate without asking you a lot of questions, that quote is completely useless. There are so many factors that affect what rate a lender can offer you, it would be like a doctor trying to diagnose you without even asking what your symptoms are. The low quote that is thrown out there with no questions asked is a quote based on the perfect conditions. If you fit neatly into their tiny little box of requirements, then sure, that rate is available. However, mortgage lending is not a “one size fits all” type of service. But just to give you an idea, some of the things that will determine the actual rate you can get include: the size of your loan, the type of documentation you can provide, if you are taking cash out, what your credit score is, the loan-to-value of the home, if it’s a primary residence or investment property, if there is a second loan on the home, if it is a single family residence, condo, or multiple units, if there is a prepayment penalty, and the list goes on. 

 

7)     Rate lock period. Some lenders can rope you in by quoting a low rate that is only good for 7 or 12 days. Well, if you aren’t closing your loan for 3 weeks, that lock in period is of no use to you. The last thing you want is to be half way through the loan process and find out that your rate expired. There are hefty fees for getting a rate lock extension, so be sure to ask how long the rate they are quoting is good for.

 

8)     Prepayment penalty. This is one of the most common traps people fall prey to. They get a great rate, but when it comes time to refinance for some reason, or when rates go down, they are stuck in the loan. Imagine if rates drop significantly and everyone is enjoying all the money saving benefits of the changing market, but it would cost you $20,000 just to get out of your current loan. Or perhaps your spouse unexpectedly gets relocated and you have to sell your house. Guess what? The lender gets rich off penalizing you for getting out early.

 

9)     Many lenders are offeringa “mortgage rate reduction” which implies you would be getting a reduced interest rate. Many times this “reduction program” is referring to reducing your monthly payment. Again, this lower payment does not always equate to a better deal. Refer back to “Neg-Am” on number 1.

 

10) Online rates that are too enticing to pass up are sometimes the most misleading offers out there.   Anyone can throw up a website and quote rates that are below market. The problem is, the person quoting could be working out of Nebraska with about 3 months of experience. Closing costs vary from state to state, and out of state lenders are not always aware of local and state requirements. The online lenders you see on TV, radio, and billboards, have a very high advertising expense – an expense that is passed on to you.

So the next time you hear “1.25% fixed”, or “Bad credit? No credit? No problem”, just remember, lenders are all fishing out of the same pond and working with the same economic conditions. If something sounds too good to be true, it probably is. Cross check any offers you get with the items listed above, and take a written offer or Good Faith Estimate to someone for a second opinion. Hopefully this has armed you to protect yourself from false, incomplete, or misleading advertising. Also, keep in mind it is really just a few bad apples that are giving the entire industry a bad reputation. For the most part, the vast majority is compliant.