How to Avoid the Most Common Home Mortgage Mistakes
Most people will check the Internet or pick up the newspaper to look up current interest rates. What you see isn’t always what you get. Unfortunately, there are many ways to get hurt when shopping for the best rate:
Short Pricing –It is not necessary for lenders to state the “lock-in” duration when advertising a rate, so while a rate may sound good, it may not allow enough time for you to close on your loan. Most people don’t ask how long the quoted rate is guaranteed for – so make sure you do!
Low Ball Pricing – Some companies will lure you into a mortgage application with promises of low rate only to have the rate changes for the worse just before closing. They may tell you your rate has expired, the program is no longer available or even delay the closing to break the lock. It is not nearly as important to shop rates, as it is to shop for a reputable lender.
Products – With all the different products and options available, borrowers need a good mortgage professional to help the choose the right one that will best suit their needs and goals. After all, a mortgage is typically the largest financial transaction people make in their lifetime. It is far more costly to get the best rate on the wrong product that it is to get a competitive rate on the right program for you.
A "seller contribution" is one of the best-kept secrets in the home-buying process. That’s when the seller of a home puts up some of the money needed toward the buyer’s closing costs. It can mean the difference between a sale of a home and no sale.
Seller contributions can be negotiated at the time of a home purchase by having the seller pay closing costs rather than or in addition to a reduction of the home sales price.
A seller contribution can seal a home purchase in some cases where the buyer does not have enough cash for both the down payment and closing costs. Many people can qualify for the payment on a home mortgage but encounter challenges in gathering the necessary cash. Often people worthy of a mortgage don’t have a lot of ready cash sitting around at the moment they find their dream house. Don’t let the idea of a seller contribution scare you. An experienced mortgage broker or banker can help you figure out the best way to put a deal together. He or she should also be able to help you understand the details well enough to be comfortable with the purchase structure.
There are many other benefits of utilizing a seller contribution. Using the money from a seller contribution for the closing costs can free up more cash for a larger down payment. This can reduce or eliminate the need for private mortgage insurance (PMI) and can thereby save the borrower anywhere from $50 to $200 each month in PMI charges. This can also be used to achieve better price break points in the loan to value ratio to help the borrower get a better interest rate. Another benefit is the improved pricing or accessibility of "no income verification" mortgages. This is where the borrower cannot verify the income needed but may still obtain the mortgage by increasing the amount of down payment. If the borrowers have consumer debt with high monthly payments, preventing them from qualifying, they can use the seller contribution to pay off some or all of those debts. This allows them to now qualify or significantly reduce their overall monthly payments. Also, closing costs are virtually non-tax deductible. However, points are still tax deductible. If paying points, it is very smart to use a seller contribution because while the seller pays the points, they are still tax deductible to the buyer.
A Seller contribution is easy to implement. There are no negative tax consequences to the seller except for a negligible real estate transfer tax in some areas. A seller contribution must be fully disclosed. The amount of seller contribution must not exceed the actual amount of closing costs. The buyer or real estate agent should check with the lender to make sure that they are within allowable limits, normally 3 to 6 percent of the of purchase price.
Paying too much for Title Insurance is a very common mistake. All lenders will require Title Insurance each time a mortgage loan is granted. This is because it insures the title to the property is free from any surprise liens that occurred previously. So in essence, it covers the timeframe prior to the mortgage closing. That is why a new one needs to be done even on a refinance. Generally speaking, law regulates title policy fees so all title companies charge the same amounts.
There are a few different things you can do to save yourself money on title insurance. If you are refinancing, you can save over 50% by providing your old title policy and get the “refinance instead of the higher “basic“ rate. Even on a purchase, you can save 20 to 25% by getting the” re-issue’ rate if you get the old title policy from the seller.
PRE PAYMENT PENALTIES
Watch out for pre-payment penalties. I don't like prepayment penalties under any circumstance and would do my best to avoid them. If you are getting a great deal on a loan that has a prepayment penalty then try to keep it to a one-year period. Additionally, make sure it's a "soft" prepayment penalty. That means there is no penalty if you sell your home and you can reduce your principal up to 20% per year. The only time you pay the penalty with a soft prepayment penalty is if you refinance. Still, there are so many options out there, why be stuck with a lemon like a pre-pay.
Negative amortization is when the loan balance increases rather than decreases. This is a dangerous game and is offered in exchange of a lower payment. An example might be where the borrower makes a payment based on a low 4% rate but the actual rate being charged is 8%. The difference between what is being charged and the amount paid is added to the loan balance. Just like a credit card! You pay interest on the interest as well. You home should not be treated like a credit card. If the situation persists and home prices level off or even depreciate like they did 10-years ago, you may be unable to sell your home because you owe more than the value. You may also be unable to refinance the loan because you exceed the maximum loan to value limits. Avoid this like the plague.
by Dr. Gordon