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Consumers can make mistakes
when they buy or build a house, during any of the stages involved in obtaining a
mortgage, or in managing the mortgage afterwards. Those listed
below are common. Clicking on one will take you to the article that
explains why it is a mistake.
BUYING A
HOUSE
Look
for a house without knowing how much you can afford to pay.
Assume
that the FHA will protect you from buying a house with major defects.
Assume
that stretching your house-purchasing ability to the limit will maximize your
wealth over the long term.
Purchase
a house with someone not your spouse without a written agreement.
Assume
that you must close on the sale of your existing house before you can close on
your new house.
Shop
for a mortgage that allows home purchasers to consolidate existing debts.
Buy
a manufactured house through a dealer with a package that includes house,
installation, site and financing.
Allow
the purchaser of your existing house to assume responsibility for your existing
mortgage without a release of liability.
Decide in advance that you will consolidate debts in a new purchase mortgage,
then only price mortgages that allow it.
Borrow someone else's
bank account to show you have the cash reserves needed to buy the house.
Buy a house
under a lease-purchase contract that allows the seller to cancel the option to
purchase for a trivial violation, such as a single late rent payment.
Finance settlement costs without considering whether it will raise the price of
the mortgage.
BUILDING A HOUSE
Accept
a deal from a builder that ties concessions to use of a preferred lender.
Assess
a combination construction/permanent loan without comparing the lender's terms
on permanent loans with those of other permanent loan lenders.
SHOPPING FOR A
MORTGAGE
Select
the loan provider offering the best price over the telephone or in the
newspaper.
Assume
that rate quotes from loan providers are always given in good faith.
Assume
that the rates quoted in the media are the rates at which you can borrow.
Solicit
price information without giving the loan provider all the information about
your loan that may affect the price.
Accept
lender referrals from other borrowers uncritically.
Assume
that you can shop lender A today and lender B tomorrow.
Assume
that the loan provider who offers the best deal on one type of loan will also
have the best deal on another.
Assume
that the loan provider offering the best deal at 0 points also offers the best
deal at 3 points.
Assume
that a payment made by the lender to the mortgage broker is not a cost to the
borrower.
Assume that a "discount mortgage broker" will cost you less.
Select
a lender without knowing any of the lender charges except points, then try to
negotiate other charges afterwards.
Assume
that the way to negotiate settlement costs is to make the lender justify each
cost.
Assume
that it never pays to shop for title insurance.
Assume
that since finance charges are deducted from the amount financed, you won't have
to pay them.
Allow
yourself to be solicited for a reverse mortgage.
Neglect
to ask what the margin is on your HELOC.
Assume
that the Government requires lenders to disclose everything that is really
important to borrowers.
Respond
favorably to a solicitation without checking other options.
Confuse a no-cost mortgage with
a no-cash mortgage.
QUALIFYING FOR A
MORTGAGE
Assume
that paying off credit cards on which you have been delinquent will improve your
credit score.
Assume
that because you are an authorized user of a credit card and not responsible for
the payments, you can't be hurt if the responsible party does not pay.
Assume
that shopping multiple loan sources will adversely affect your credit rating.
Confuse
"qualification" with "approval".
Accepting
that you need an adjustable rate mortgage to qualify because the loan officer
said so.
Wait
until you need a mortgage before paying off an old collection account.
SELECTING THE
MORTGAGE
Assume
that the amount of interest you pay over the life of the mortgage is more
important than the interest rate.
Assume
that paying points is a loser.
Assume
the amount of cash you put into the transaction is the same as the down payment.
Assume
that a "no-closing cost loan" is a good deal.
Assume
that the cost of mortgage insurance is the premium rate which is comparable to
the interest rate.
Assume
that ARMs are to be avoided unless you need one to qualify.
Assume
that negative amortization is to be avoided at all costs.
Assume
that you must pay extra to convert a monthly payment loan into a biweekly
payment loan.
Make
a large down payment on an FHA loan.
Neglect
to ask about the second mortgage lender's policy on subordination.
Neglect
to ask whether your loan has a prepayment penalty, and verify the answer on the
Truth in Lending (TIL) disclosure statement.
Use
the APR to assess the cost of different mortgages, even though you expect to be
in your house only a few years.
Use the APR to assess the cost of a cash-out refinance with the cost of a second
mortgage, or the cost of different HELOCs.
Believe
it when you are told that you will save money with a simple interest mortgage.
If
you have a simple interest mortgage, not making your monthly payments early.
Assume
that because you are a veteran, your VA loan will be fairly priced.
Believe
that an interest-only loan is less costly to amortize, or carries a lower
interest rate than the same loan without the interest-only option.
Believe
that on an interest-only ARM, the initial rate holds for as long as the
interest-only period.
Select
a flexible payment ARM without considering the risk of serious payment shock
down the road.
Assume
that the rate index used by an ARM, such as COFI, Libor, MTA, etc, is all you
need to know to assess the ARM.
Base a loan selection on
the payment including the escrow payments.
Take a
30-year FRM, even though you can afford the payment on a 15-year FRM, in the
expectation that you will invest the cash flow difference.
Confuse the
payment rate with the interest rate.
LOCKING THE PRICE
Allow
the price to float on a home purchase transaction.
Accept
a mortgage broker’s verbal assurance that the loan has been locked with the
lender.
Select
a lock period that isn't long enough for the lender to finish processing the
loan.
Believe that
fixed-dollar lender fees, and rate adjustment caps on ARMs, are covered by
locks.
TAKING A SECOND MORTGAGE
Consolidate
existing debts in a new second mortgage without considering the implications for
your ability to terminate mortgage insurance, refinance your first mortgage,
move to another city, etc .
Raise
needed cash with a new second mortgage, or with a cash-out refinance, without
comparing the costs of the two alternatives.
Pay
for mortgage insurance, or take a second mortgage to avoid mortgage insurance, without
considering whether the alternative might be cheaper.
Raise
cash by borrowing against a 401K rather than by taking a second mortgage.
Neglect
to ask what the margin is on your HELOC.
Neglect
to ask about the second mortgage lender's policy on subordination.
REFINANCING
Measure
the benefit of refinancing by comparing the reduction in monthly payment with
the cost to refinance.
Shop
your existing lender first, rather than last.
Refinance
periodically as a way to raise cash.
Take
a no-cost refinance when you expect to be in the house for a long time.
Measure
the cost of a cash-out refinance with the APR.
Refinance
into a biweekly at a higher interest rate for the purpose of reducing total interest
payments.
Taking
a cash-out refinance with the cash going to another lender who provides a
lower-rate mortgage and assumes responsibility for the cash-out refinance.
Assume
that a refinance is a good deal if it results in significant savings over your
existing mortgage.
View
refinance and prepayment as alternatives.
Refinance
without taking advantage of the 3-day right of rescission to ask yourself if the
deal will really leave you better off.
Respond to a solicitation for a 1.25% mortgage.
Rely on a mortgage broker or loan officer for advice on whether to select a
second mortgage or a cash-out refinance.
MANAGING THE MORTGAGE
Take
out a mortgage for the express purpose of getting a tax deduction
Fail
to check if the lender is crediting payments (especially extra payments)
properly.
Assume
your credit won't be badly damaged if you skip just one payment.
Agree
to co-sign for a friend or relative without considering all the implications.
When
a financial reversal endangers your capacity to pay the mortgage, do nothing
until the lender calls about your delinquency.
When you have excess
funds to use to reduce principal on either of two mortgages, allocate the funds
to the mortgage on which the largest percent of the current payment is being
allocated to principal.
Taking a short-term second mortgage when you can no longer make the payments on
the first mortgage, and your credit is shot, but you still have equity in the
property.
When
you receive notice of an increase in required escrow payments that you know is a
mistake, don't pay it.
Throw out mortgage servicing statements after a year or two..
Let the
first ARM rate adjustment catch you by surprise.
Stop paying the
mortgage in anticipation of the sale of the home.
When you
can't afford the upcoming payment on an ARM, wait for the lender to approach you
about modifying the contract.
Copyright Jack
Guttentag 2008
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