By Karen
P. Varcoe
Consumer
Sciences Specialist
University
of California, Cooperative Extension
While
current low mortgage rates are encouraging people to enter the housing market,
they are also enticing predatory lenders to take advantage of unsuspecting,
eager new buyers. A few tips will help you to arm yourself against devious loan
companies.
You can
avoid paying PMI Buyers
whose down payment is less than 20% of the purchase price must pay private
mortgage insurance (PMI), in addition to principal and interest. Unlike mortgage
interest, PMI is not tax deductible.
To avoid
PMI, many people take out an 80-10-10 loan, which means taking out two
mortgages, with a 10% down payment, an 80% first mortgage, and an additional
loan to cover the remaining 10%. The second loan increases your effective down
payment to 20%, which allows you to avoid PMI. Also popular is an 80-15-5 loan,
with a down payment of only 5%.
The
disadvantages of this form of loan are that you have two mortgages, instead of
one, and that the smaller mortgage will carry a higher interest rate. However,
if the amount saved on PMI exceeds the costs of the higher second loan, you’ll
come out ahead, so ask your lender to make the calculations for
you.
Closing
Costs are Higher at the Beginning of the Month Starting
from the closing date on your home, you have to pay interest on your mortgage,
until you have paid off the full amount of the principal. Usually mortgage
lenders arrange payment dates to coincide with complete calendar months, so that
at closing you pay the interest you owe for the time between closing and your
first full monthly payment.
While
this practice means that your closing costs will be higher if you close at the
start of the month, rather than at the end, your first mortgage payment will
only be due a month later, so you won’t lose any money
ultimately.
If You
Plan to Stay, an ARM May Not Be the Way Adjustable-rate
mortgages (ARMs) often allow buyers to borrow more money, which translates to
larger commissions for the brokers and encourages them to market ARMs more
aggressively than fixed-rate mortgages.
While
the low introductory rates on ARMs may lure homebuyers, later the fluctuating
rates, driven by the economy and the Federal Reserve, can become uncomfortably
high. If you plan to keep your home for more than five years, you will probably
be better off with a 30-year fixed-rate mortgage.
Negotiate
the Broker Fees Mortgage
brokers buy mortgages at wholesale rates and sell them to you at retail rates.
Before you sign for a mortgage, the lenders must disclose their commissions, but
you may negotiate the fees, particularly if you are taking out a jumbo loan. On
standard loans, reasonable markups range between 1 and 1.5
percent.
Don’t Be
Fleeced by These Schemes If you
are familiar with the following devious schemes commonly used by dishonest
lenders, you’ll be less likely to fall prey to them.
Bait-and-switch The
lender promises you one type of loan or interest rate, but actually gives you a
different one. Often the higher interest rate doesn’t take effect until several
months after you start paying off your loan.
Equity
stripping
Equity
in your home is the amount you own above your mortgage. Lenders may encourage
you to borrow heavily against your equity (to consolidate debt, pay for home
improvements, and so on). If the payments and fees become too high for you to
afford and your equity becomes sufficiently reduced, the lender can foreclose on
your loan, take possession of your home, and strip you of the
equity.
Loan
flipping If you
need extra money, some lenders will encourage your to refinance your mortgage several times.
Each refinancing incurs fees and you may end up with a higher interest rate than
you had originally. If your payments become too high, you may face foreclosure
on your loan.
Loan
packing Some
deceitful lenders will try to include fake or unnecessary charges in your
contract. Sometimes they will encourage you to purchase insurance that you don’t
need. They may also charge for services that don’t exist.
Home
improvement scams Dishonest
contractors may try to lure you into agreeing to expensive, often unnecessary
repairs, which they suggest you finance through a particular lender, who has the
loan proceeds sent directly to the contractors. Often the work is not
satisfactory, and you will be left with a long-term high-interest
loan.
Mortgage
servicing scams Once
you have the loan, the lender tells you that you owe more money for fake taxes,
insurance, legal fees, or late fees. Some lenders discourage you from paying off
your loan or refinancing with a different lender by giving you incorrect
information and making you pay more than you owe.
# #
#