Creative Financing
Do Not Be Fooled By Mortgage Brokers and Mortgage Lenders
Watch out for creative financing. Today’s mortgage market has proved to be very tough and only appears to be getting tougher. Unfortunately in markets like this, many mortgage brokers and mortgage companies introduce a variety of expensive mortgage products that are simply unsuitable for many borrowers.
Option ARM/Pick-a-Pay
As rates begin to creep up, option ARMs and Pick-a-Pay loans will become the product of choice for many brokers to push. These products allow the borrower to choose how much they would like to pay during any given month, with some very low minimum payment requirement. These loans allow many people who could not ordinarily afford to make payments on a home to make interest-only payments or payments significantly below the standard principal amortization plus interest payments.
There are two watch-outs for these types of programs. First, they typically have higher interest rates than standard loans. These loans may have an additional 0.5%-1% interest over standard conforming or jumbo mortgages. Additionally, much like the way interest is accrued on a credit card, these products tack on interest to any unamortized principal. What this means is that at 10 years of making the minimum payments, a borrower will owe significantly more than they started out owing. Furthermore, if their home is not in an area where appreciation is fairly high, they will probably owe more than their home is worth after five years.
No Money Down/No Credit Check Loans
These really don’t exist anymore, so if a broker or lender tries to push this with an upfront fee, it is almost guaranteed to be a scheme. People with poor credit should take this time to pay off any back debt and avoid any more miscues for the next year or two. While it would have been possible for these borrowers to obtain a loan last year, those doors are now closed. Additionally, they don’t appear to be opening in the next two to five years.
General Advice
It is generally a good idea to avoid paying any mortgage broker or lender any money upfront. Most loan specialists can quote rates and give you a certified commitment letter before they ask for any money down. Typically, these parties get paid out of the proceeds from closing. Paying anyone upfront will, more than likely, result in over promising and under delivering.
Additionally, it is wise to see two to five mortgage brokers. Compare rates and reputations. Many brokers can quote rates in a matter of minutes and give borrowers an estimate of closing fees right over the phone. Avoid getting caught in a bait and switch situation by having at least one back-up broker ready to take the case. Try to do this all in one 30-day period to avoid any negative credit rating effects.
Finally, read everything. Most loan documents are standard; however, many mortgage broker documents have very specific language to their brokerage. Don’t sign anything that does not make sense or that does not seem right. It will be a pain in the neck, but read everything and ask tons of questions. This simple step could save a borrower thousands of dollars and hours of headaches.
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