Tag Archives: Bankrate.com

Costly Mortgage Mistakes

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Ship on Rocks

Consumer Reports Money Adviser quoted me in Don’t Make This Costly Mortgage Mistake; How to Weigh Your Options Before Your Settle on a Deal (only available in Spanish without a subscription!) (UPDATE:  NOW IN ENGLISH TOO). It reads, in part (and in English),

As with anything you buy, scoring the best deal on a mortgage or refinancing involves shopping around. Yet 77 percent of borrowers applied for a loan with a single lender instead of checking out several to compare costs, according to a recent study by the Consumer Financial Protection Bureau. “People may well put more time and effort into shopping for smaller products such as appliances and televisions than they do in shopping for the right mortgage,” the bureau’s director, Richard Cordray, said in a statement. But the potential savings from doing your homework are significant. If you get a $250,000 30-year fixed-rate mortgage at 4 percent interest from a lender instead of paying 4.5 to another, you’ll save $26,345 over the life of the loan.

We know it can be difficult to find the right mortgage; the process can be intimidating. Following these steps will help you navigate better:

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2. Decide which type of mortgage is right for you

Before you shop, determine how much you want to borrow, which type of mortgage you want, and how long a term you need so that you can compare lenders’ products.

Most borrowers go with a fixed-rate mortgage, usually for a 30-year term, to spread out the cost of a home purchase over time while making predictable payments each month, says David Reiss, a professor who teaches real-estate finance law at Brooklyn Law School. Those loans make sense especially when rates are low and for buyers who intend to own their house for a long time.

But also consider an adjustable-rate mortgage (ARM), also called a variable-rate or floating-rate mortgage), Reiss says. It has an interest rate that’s fixed for an introductory period of time, then changes periodically, usually in relation to an index. The introductory rate is often lower than the rate on fixed-rate mortgages. For example, the average 30-year fixed-rate mortgage recently had an annual percentage rate (APR) of 3.5 percent, according to Bankrate.com; the average 5/1 ARM (which adjusts annually after five years) was 2.67 percent.

When the rate adjusts, it can sometimes result in a sizable increase in monthly mortgage payments. “ARMs are appropriate for people who anticipate relocating or paying off the loan before it adjusts,” Reiss says, “or for empty nesters who don’t plan to stay in a home for many years.”

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4. Push for a better deal

After you have found the best offer, try to negotiate even better terms. Ask the lender whether he will waive or reduce any of the fees he is charging or offer you an even lower interest rate (or fewer points). You are unlikely to get fees waived from third parties, like those for a title search, government processing fees, and appraiser fees, Reiss says. “But you may be able to cut the lender’s fees, like its underwriting, document processing, and document preparation costs,” he says.

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Reiss on Anatomy of a Mortgage

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MainStreet quoted me in The Anatomy of a Mortgage – Determining Which Fees You Need to Pay. It reads in part,

All mortgages are not created equal, so reading the fine print before you agree to a long-term commitment is crucial.

Mortgage lenders now have become “very risk averse” since the financial crisis and are doing everything “pretty much by the book,” said Greg McBride, the chief financial analyst for Bankrate.com, a New York-based personal finance content company. “The rules on the ability of a homeowner to be able to repay are stricter than ten years ago,” he said. “Niche products have gone back to niche borrowers.”

While lenders are offering fewer risky products such as interest only mortgages to run-of-the-mill consumers, there are still hidden fees and other deceptive practices to be wary of, said Jason van den Brand, CEO of Lenda, the San Francisco-based online mortgage company.

In 2013, the Consumer Finance Protection Bureau issued guidelines to protect consumers from the types of mortgages that contributed to the financial crash. In the past, lenders were approving mortgages that allowed consumers to borrow large sums of money without any documentation such as pay stubs and offered extremely low interest rates to lure people into buying homes.

 “It also doesn’t mean that the potential to get bad mortgage advice has been eliminated,” van den Brand said. “There aren’t bad mortgage products, just bad advice and decisions.”

Here are the top seven things consumers should consider carefully.

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Avoid choosing an adjustable rate mortgage or ARM when it makes more sense to select a fixed rate mortgage. Those low initial rates offered by ARMs are enticing, but they only make sense for homeowners who know that in less than ten years, they plan to upgrade to a large home, move to another neighborhood or relocate for work. Many ARMs are called a 5/1 or 7/1, which means that they are fixed at the introductory interest rate for five or seven years and then readjust every year after that, which increases your monthly mortgage payment said David Reiss, a law professor at Brooklyn Law School.

While many homeowners gravitate toward a 30-year mortgage, younger owners “should seriously consider getting an ARM if they think that they might move sooner rather than later,” he said. If you are single and buying a one-bedroom condo, it is likely you could sell that condo and buy a house in the future. “That person might not want to pay for the long-term safety of a 30-year fixed rate mortgage and instead save money with a 7/1 ARM,” Reiss said.

Reiss on Refinancing

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MainStreet quoted me in Fed’s End to Quantitative Easing Will Affect How You Invest and Buy a House. It reads in part,

The Federal Reserve’s decision to end its bond buying program after six years to help boost the economy is a sign that more recovery and growth will occur. So what does the typical American on Main Street need to know?

While the Fed did not indicate a timeline for when interest rates will rise, consumers should be prepared and “see the writing on the wall” since variable rates such as credit cards, adjustable rate mortgages and home equity loans will start to rise slowly and gradually, said Bankrate.com chief financial analyst Greg McBride, CFA.

“The low interest rates will come to an end,” he said. “Consumers should pay down debt while the rates are low rather than contend with it once rates move up.”

Mortgage rates will remain low but will fluctuate according to global risks, not because of any actions taken by the Fed, said Ernie Goss, a professor of economics at Creighton University in Omaha. Consumers should expect rates for short term rates such as auto loans to rise “ever so slightly” between now and July 2015, he said.

The good news about rising interest rates is that savers will begin earning more on their nest eggs, but the increase could be offset by a higher cost of borrowing and could discourage people from getting loans and spending, said Gail Cunningham, a spokesperson for the National Foundation for Credit Counseling, a Washington, D.C. non-profit organization.

“If mortgage rates rise, consumers with variable rate mortgages will see their monthly payments go up, putting a dent in the amount they have available for disposable spending,” she said.

Even if mortgage rates do increase, consumers need to consider the costs of refinancing before they embark on the process, said David Reiss, a law professor at the Brooklyn Law School in New York. Homeowners need to determine how long they plan to live in their home and if the cost of refinancing outweighs the lower monthly payments.

“If you are not sure that you will be there for a few years at least, the cost of refinancing may be more than the amount you save in decreased interest payments,” he said. “How many years will it take you to recoup that cost in reduced interest rate payments?”