It’s a good time to buy, but don’t get scammed
Putting it mildly, these are strange times in the real estate market. Lenders are no longer jumping at the chance to arrange mortgage loans. Potential homebuyers are no longer in the mood to speculate and can’t afford high down payments. Yet home values and interest rates have fallen dramatically. If you can make it work financially, this is a good time to buy a house. Oh yes, if you can avoid being scammed.
What is a mortgage?
A mortgage is a loan developed to finance the purchase of real estate, with payment periods and interest rates specified. The borrower gives the lender a lien -- the right to retain possession of the property -- as collateral for the loan while repayments are being made. It sounds simple. But in the end, it’s far more complicated than merely borrowing money and agreeing to pay it back.
Here are a few secrets of the mortgage-loan business, compiled from lenders themselves, which can help you steer clear of unwanted and unnecessary expenses.
Video: What is a "No Closing Costs" Loan?
Secret #1: No-cost mortgages aren’t what they seem
Fees charged by the individuals who work for you to arrange a mortgage and transfer the property to you at the time of closing are generally reasonable. These people are professionals and have to put food on the table. That’s why anyone claiming to offer a “no-cost mortgage” is a scam artist. Statements such as "No cost to you" mean that you will pay no out-of-pocket costs at closing. But you will pay. These unscrupulous lenders will simply roll the closing costs into your loan balance.
Video: Eliminating Private Mortgage Insurance
Secret #2: Private Mortgage Insurance isn’t a necessity
(PMI) is not a scam, but it may be unnecessary. PMI protects your lender if you default on the loan. Generally, it’s required if your down payment is less than 20% of the price of the home or when the amount you borrow is greater than 80% of the appraised value of the property. This works to the advantage of homebuyers who can’t put a lot of money down. But PMI premiums, paid over the life of the mortgage, cost the homebuyer thousands of dollars. You can request that PMI be canceled when you pay down your mortgage to 80% of the original purchase price or the appraised value of your home. However, it’s better to eliminate the need for PMI altogether by budgeting and saving until you can afford a 20% down payment. Another way to eliminate PMI is to buy a property well below market value and have your bank appraise it at much more than you paid.
Secret #3: The Yield Spread Premium is a kickback
A Yield Spread Premium (YSP) fee is one paid by a mortgage lender to a mortgage broker in return for the broker’s arranging a loan with a high interest rate. It’s a kickback, and it does not help the borrower. A slight difference in interest rate can add thousands of dollars to your payments over the course of the loan. To avoid being unpleasantly surprised at closing, ask your broker for a good-faith estimate of all the transaction fees you’ll pay and for what. By law, brokers must disclose their commissions before you sign anything. Obtain a copy of your credit score and use it to get an estimate of the rate you should pay for the type of loan you want. Shop around and compare broker to broker. Armed with this information, you may be able to negotiate a lower rate and/or a dismissal of fees.
Secret #4: Mortgage application fees are unwarranted
Most lenders will accept your mortgage application without charge. Others will try to charge a fee for accepting your application. Simply put, if a lender wants to charge you for this, keep shopping. You’ll find lots of lenders who do not charge these fees or who will wave them in order to retain your business.
Secret #5: Pre-payment of your mortgage is smart
In the first few years of payments on a mortgage, just a miniscule amount of money goes to repaying the principal balance; most of goes to paying the interest. The advantage of paying off a mortgage early is another big secret. Many mortgage contracts allow borrowers to do this. Check your contract to see if it contains a pre-payment clause. By making extra payments, you shorten the length of the loan, pay off the principal ahead of schedule and own your house earlier, sometimes by many years, than you would have otherwise.