10 Mortgage Mistakes from BusinessWeek

This was a great read and I wanted to share it with any of my visitors. I can summarize by simply saying; do your homework and ask as many questions as you deem necessary to your comfort level. Never take any fee or process at face value if you are concerned. - Nick Sims

Beware the origination fee
While they barrage you with the financial terms of your mortgage, a loan officer will hope you don’t notice the origination fee, which is the main negotiating point on the Good Faith Estimate.

An aggressive lender will try to procure an origination fee of up to 5% — which means on a $200,000 loan, they could make a $10,000 commission. The fee is nearly always talked down by an astute borrower, and sometimes dropped altogether.

Trusting the first loan officer you interview
Rather than corner yourself with no comparisons, do the due diligence. Sit down with one loan officer to get your questions answered, then approach three to four other lenders by phone or e-mail with your credit score and the amount you want to borrow. Then make the call. “Some of them probably won’t even [respond] to you, because they only want to deal with Mr. or Mrs. Low Credit Rating,” says ex-loan officer Janusz.

Using an interest-only adjustable-rate loan to qualify for a more expensive house
A pitfall where the borrower is probably more to blame than the lender is an ARM loan that outpaces affordability somewhere down the road. Be aware of what you are getting yourself into for the long haul.

Thinking interest rates are the main thing
“You hear companies offer fabulous rates, but what are you paying in closing costs to get them?” Janusz says. “It would be like comparison shopping for cars and only looking at the headlights.”

Not comparing final fees listed on the closing documents
During closings borrowers tend to get tired while they sign dozens of papers, so it’s easy for the lender to sneak in fees running as high as $1,000 combined. The practice of lenders “packing the loan” will continue as long as borrowers don’t attend to the fine print of the arrangement.

Not knowing if the mortgage has a prepayment penalty
In the Truth in Lending statement, there will be a checkbox letting you know that if you do not complete the terms of the loan, you will be required to pay a prepayment penalty. If the penalty is in place, it will punish the borrower who wants to refinance.

Thinking that renting means throwing money away
Buying a starter home in particular can be a risky investment, once you factor in realtor fees and closing costs. “If you made the wrong decision,” Janusz points out, “you just cost yourself [around] $10,000.” He advises first-time buyers to lay low in a rental until they can afford the premiums of a home they can live in comfortably for 5 to 10 years.

Not considering back-end yield spread
The Service Release Premium, the device by which lenders are guaranteed a juicy fee, often doesn’t even need to be disclosed — a practice Janusz and many of those who know about it believe to be a breach of ethics.

Paying for credit or mortgage life insurance
“[Lenders] are obviously not insurance agents,” Janusz notes. “They’re the middleman looking to make a profit, so they mark it up. You can do far better if you go to the source: an actual insurance agency.”

Paying extra to set up a biweekly payment plan
Making extra periodic payments directly toward your principal can help you get out of a 30-year mortgage in as little as 23 years, but it’s something borrowers are completely capable of doing for themselves. Lenders will typically charge between $500 and $1,000 for this redundant service.

Source: 10 Mortgage Mistakes - BusinessWeek