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Here are some mortgage Insights and pitfalls to
avoid. Be aware of deceptive practices when
getting a mortgage.   

Have you ever heard a pitch from a mortgage
salesman that went something like this: “If I could
lower your monthly payment by $300 dollars, would
you refinance your mortgage with me?”  This may not
sound like a bad deal, and it isn’t necessarily, but
there is a quite a bit more to consider than just this.

Learn as much about of the company you are dealing
with as possible. Some brokers and banks pretend
that they are able to get “deals” for you that are
indicative of how much better their company is than
others. The reality is, except for very infrequent
circumstances, all banks/brokers are dealing with a
similar cost of mortgage money. So any deal they are
able to offer should be similar to other qualified
operations. They are not able to get you a cheaper
loan based on their cost of capital. The only way they
can compete financially is on the amount of fees they
charge.

Of course, they can compete on service, competence,
advisory capability, etc., and that is indeed worth
something. But that needs to be evaluated separately
from any discussion of saving X dollars a month, or
how good the deal the current pitchman has. A
knowledgeable salesman/banker can help identify
your needs and guide you into the right product at the
right time.  This is much different than one who is
touting huge savings, regardless of your situation.

So, back to saving $300 a month claim - First, all
other factors must be equal for it to have validity. The
loan must be for the same remaining term that you
have remaining on your current loan. If you are paying
$1,500 a month, with ten years left on your current
mortgage, then the comparison must be with a ten
year loan. If it’s made with a typical fifteen year loan
time-frame, of course the payment will be significantly
lower, since it is spread out among many more
payments. If you look at the total costs of the new loan,
you may see they may now be higher. So that needs
to be checked. Most people would probably catch
this. Often, however, multiple changes are made in the
loan at the same time so the benefit is nowhere near
as great as it first appeared.

For instance, they may be lowering your monthly
payment, largely through a switch to an adjustable rate
mortgage, and secondly by increasing the term of the
loan. Perhaps general interest rates have come down.
This will be packaged as if you are saving big money
on a monthly basis primarily because interest rates
have come down. The adjustable feature itself drives
the interest rate down. You are probably getting a
quarter to half percentage point lower rate with the
adjustable rate. But the reality is you are taking more
risk with the adjustable terms to get the lower interest
rate. Also, you are achieving lower monthly payments
by spreading out your current loan further into the
future. Is this what you really wanted to do?

Don’t forget that an adjustable rate mortgage is only
appropriate for those who expect to be in their home
for less than five years, and ideally for less than the
adjustable rate period. It’s true you may benefit in the
short run by switching to an adjustable rate loan.
However, you are betting that interest rates will stay
reasonably low by the end of the adjustable
timeframe. This risk can be glossed over by those
eager to get you to enter into a new mortgage
transaction. It’s important to appreciate the true risks.
There is a significant chance that interest rates will be
much higher in five tears than they are now.  Only
those in excellent financial condition, able to withstand
a large interest rate and payment increases, should
take risks of this type.  

Another trick is to quote a monthly payment without
the equivalent tax and insurance payments built into
the quoted payments of the loan. In other words, you
are quoted a loan without tax and insurance included
in the payment, for comparison with your current “stub”
payment, which does include those charges. Perhaps
those charges have been purposely underestimated
by the new mortgage company in their calculations. It
is not until closing that the true charges are
“uncovered”.  You may then realize that the benefits of
the new loan have been overstated. This is why it is so
important to have a bank/broker that you can trust, as
they will steer clear of these questionable tactics.   

New financial rules, such as Restoring American
Financial Stability Act of 2010 (RAFS)
as well as new RESPA rules, are being put in place to
help you combat deceptive practices by mortgage
professionals. Make sure you are just as aware of the
rules and the protections they afford as the mortgage
products that are being sold to you.   

Again, it is important to have an honest and
knowledgeable mortgage advisor to help you through
the mortgage process. Just as important is to find one
whose compensation is not tied to the terms of the
loan.

For more information please go to the
Mortgages
section.


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_________________________________________
Getting a Mortgage - Be Aware of
Deceptive Practices.
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