Home Mortgage Loan Protection
How You Can Protect Yourself Financially on a Home Mortgage Loan
Many years ago, when looking for a home mortgage, it wasn’t a difficult task. You found the home that you liked, your realtor sent you into the bank or savings and loan association that they used, and you completed the application.
A few weeks later, the lender contacted you saying you were approved and quoted you their loan terms. This too was rather cut and dry – loan amount, interest rate, monthly payment, and the number of years. A settlement was done about a month later, and that was it.
Fast forward many years to today’s market. Wow, what a change. Instead of a small number of mortgage lenders, now there are thousands – some good and some not so good. Some of the terminology used today almost requires the borrower to be a finance person or one having a legal background.
When shopping for a home mortgage today, you must protect yourself financially. Many believe that the current regulation of lenders is still unclear at best. What that means to you is that besides doing research on the home that you want to buy, you must do research on the lender as well.
You’ll most likely have several quotes in hand and this is where you begin more research. Its critical that you check out the lender that you have decided to use and make doubly sure that you fully understand all of the loan terms and conditions before you sign. If you don’t, find someone that can explain them to you.
The acting head of the Consumer Financial Protection Bureau submitted his plan for this agency that included easing up of regulations so that it would be easier for Americans to borrow money for the purchase of homes. What makes it so unclear is that deregulation could trigger the predatory lending practices that we had a few years ago. Those lenders created sub-prime mortgages that resulted in mass foreclosures.
When we have a period of fierce competition in mortgage lending, sometimes the lenders are more interested in short-term profit instead of a longer-term success. They lose sight of the basic responsibility of matching the borrower with the best mortgage for him.
We can only hope that mortgage lenders will be able to regulate themselves and prevent a housing crisis that we had about ten years ago.
In any event, every home mortgage borrower must be certain that a lender is not taking advantage of him/her. It’s your responsibility to fully understand what the offer includes, and what could trigger a change. The following items can help you to understand when a certain type of mortgage might not be in your best interest.
- Anticipate competition among lenders – When we are in a market of having more buyers than available homes, home prices tend to increase. This causes pressure on the home mortgage lenders. Because of the lower supply of homes, home prices increase as do interest rates. When this happens, lenders profit margins go down, and the competition among lenders becomes heated.
It may be flattering for a prospective borrower to see several lenders that want to give you money, but keep in mind the old saying “all is not always what it appears to be”. Just because one proposal has the lowest rate of interest or maybe a lower down payment, doesn’t mean its the best deal.
Read the fine print in all proposals and consider the repayment term, if the interest rate is fixed or variable. Is the interest fixed for the entire term or is only for a certain number of years. You must understand the terms of each, and if you don’t, find someone who does. We can’t emphasize this enough!
- Check out the lender’s business specialty – What this means is, you should determine if a particular lender makes all types of loans, or maybe does one type primarily, such as refinancing. Many lenders, when issuing their quarterly reports, will list dollar amounts in various categories of loans.
If you can’t find it, you can ask the loan officer that you are dealing with. Often times, you’ll get a better deal if you work with a lender that has a focus on the type of loan you are looking for.
Again, be aware that there are still some lenders that don’t operate the way they are required to. A lender who specializes in the refinance market may pressure you to refinance sooner than you should. Ginnie Mae, a government-backed mortgage agency, restricted a couple of lenders recently for pushing refinancing with VA loans.
Ginnie Mae reported that some predatory lenders have been targeting veterans to refinance their loans unnecessarily. A VA program, the Interest Rate Reduction Refinance Loan, was set up to make it easy for veterans to refinance with a minimum of paperwork.
It didn’t take long for some lenders to make that program the focus of their business. They would contact borrowers a few months after the purchase of a home and offer a refinance for a very slightly lower interest rate. Until Congress gets their act together and enacts legislation that will curb these predatory lenders, your best defense against this is to make sure that you fully understand the mortgage offer presented to you.
- No need to fear an ARM mortgage – Most of the home mortgage loans today are fixed-rate mortgages for thirty (30) years. The fixed rate mortgage makes sense because we have had interest rates that are historically low for a couple of years, and they will only go one direction – UP.
Because of the long-term mortgages, the interest rates have generally been about 0.5% higher than an adjustable rate mortgage (ARM). An ARM rate normally changes after a certain period of time.
During the housing crisis about a decade ago, ARM loans became the scapegoat as the cause of the mass foreclosures that occurred. In fact, many causes for this crisis can be things such as poor lending practices, subprime borrowers, bad underwriting, making loans to sell to investors, risky credit, and the list goes on.
The ARM got a bad name due to things added on to a mortgage like negative amortization, first-year teaser rate, and especially payments of interest only. None of these marketing gimmicks had anything to do with an ARM, but the public was led to believe it was.
The reason for so many foreclosures in that period was payment shock caused not by an ARM, but by the marketing gimmicks so cleverly added on by the lenders who were in competition with each other. When those conditions came to a head, the borrowers’ monthly payment increased and they couldn’t pay it. Now when someone hears about a mortgage with an ARM, they almost panic because of the association with that housing crisis.
If you have a “normal” type home mortgage without any of these marketing smoke and mirror tactics that would cause it to be subprime, an ARM wouldn’t kick in until several years have passed. Then it would only increase in increments to prevent any payment shock.
In the market today, ARM mortgages and fixed rate mortgages have about the same default rate.
- Make sure you understand your mortgage – Mortgages have always had a reputation for being complicated and also very lengthy. Some of the words may seem strange but are common to all types of borrowing. They were initially drafted by lawyers who make sure that the rights of the lender and borrower are protected.
Ultimately, you as the borrower, have an obligation to make sure you understand what you are signing. If you’re not sure what some language actually says, or you can’t calculate future payments, get help from someone who does.
Some sources to consult may be a realtor, an accountant, lawyer, or a banker. If your mortgage has an ARM, be sure to calculate your future payments for the life of your loan or for the period you’re sure you’ll be in the home.
When you’re reviewing the mortgage, make sure that it makes sense as a benefit to you. You should benefit from things such as getting the home at a price you want or perhaps saving a large amount that may cover the closing costs on the home.
Many individuals purchase a home intending to live there for the next thirty years or so. However, the average home mortgage loan is on the books for six or seven years due to a refinance or moving. Before selling, it’s a good idea to make enough on the sale to cover all of the closing costs. If you can recover the closing costs on a sale or refinance in a couple of years, that may be a benefit to you.
No one can guarantee that you will have an increase in income by a certain amount, nor can they guarantee another recession won’t occur, causing a job loss.
What you can do though, is to make sure that the home mortgage you take out is one that you fully understand and know that you will be able to repay. Review all of the terms and conditions carefully to make certain that you have a loan that is right for you in your particular situation. Not all of them will be.