Mortgages are expensive things to misunderstand. What you don't know could cost you.

Too many eager home buyers sign up for a mortgage with their sights trained on their dream home instead of on the details in the mortgage contract they are signing. They forget that, nice as everybody is during the real estate transaction, they are all salespeople working for companies that earn profit from selling their products—in this case, mortgages.

Experienced property owners may be no further ahead since, once they have moved in, few settle back with mortgage and insurance documents to fully understand what they signed up for.

The first line of defence for consumers is learning as much as possible about relevant real estate topics before it is important or necessary to make a decision. In these changeable financial times, look for new products and choices in the mortgage world, as in most aspects of real estate, but don't expect them to play by the same rules.

If you take advantage of the educational resources available to you, you're off to a good start. If you wait until a decision must be made and plunge in, you may learn a few expensive lessons. Of more concern is the fact that many property owners and mortgage borrowers never realize how many extra thousands of dollars they have paid—often unnecessarily.

Consumer protection laws exist to protect consumers, but laws only work if consumers understand why and how they need protection. Products and services designed to comply with these laws should have explanations of rights and responsibilities incorporated in them, but if consumers don't read the fine print and ask questions for more detail, it's all just so many words.

Often the jobs of real estate and mortgage professionals seem easy to consumers because they don't understand the complexity and liability these professionals wade through in each transaction. Previous columns have introduced readers to layers of this complexity. Relevant professional organizations usually offer details on the benefits of working with professionals so Google™ away.

As new products come on the market, they are not automatically as consumer-friendly as they are portrayed. Some are created to fall under categories not covered by existing consumer protection. They're still legal, but the differences are not necessarily readily apparent to consumers.

Can you see what you might misunderstand?

• For mortgages with blended monthly payments of principal and interest, the law limits the frequency of interest compounding to annually or semi-annually. Mortgages outside this category, like variable rate mortgages or collateral mortgages, do not fall under this restriction, so monthly compounding would be allowable. Increased frequency of compounding means more interest is paid by the borrower. How frequently is the interest on your variable mortgage compounded?

• Lenders offer a range of repayment plans, marketed to attract business by making life sound easier and cheaper to consumers. That's business. Along with these variations on traditional mortgages, are those that reduce the choices open to consumers while seeming to increase flexibility. For example, mortgages are contracts set up on two time-frames:

  1. The amortization period which is the financial calculation of how long—usually 25 years—it will take to completely pay the debt of principal and accrued interest;

  2. The term which is the period that the interest rate and related repayment terms are set, usually 3 to 5 years or longer.

Opportunities to extend the amortization period sound great because they lower monthly payments. This flexibility also increases the amount of interest paid on the mortgage. Since paying off a mortgage may mean paying double or triple the amount of money initially borrowed, how much more can the cost of borrowing increase before you decide this mortgage is too expensive for you?

Once the term is set, even if interest rates go down, you'll pay at that agreed percentage for the term. When rates are on the rise, locking in for long terms sounds smart. What options does your mortgage contact allow you should interest rates drop below your current mortgage rate?

Borrowing plans that allow you to take some money now and more later can limit your borrowing choices in the future. If the mortgage, whatever form it takes or label it carries, is initially set up for a large amount, but you only take some of that at first, that large amount may appear on title. This means, if you want to, or must, borrow from a different lender, you may find the existing mortgage expressed relative to the large amount makes you a less than attractive borrower to the second lender. Ask how the staged mortgage will appear on title, or be registered, and what your choices will be if you want to switch lenders before the entire initial amount is borrowed.

If your mortgage comes up for renewal next year, start your mortgage education now. So many lenders have implemented plans to attract renewing borrowers that you might discover benefits in changing lenders. Before you shop around, ask your lender to review your mortgage contract with you and explain what your choices are. Deciding not to learn how the largest single debt you'll hold works could be an expensive decision.

All this is fine when you understand what you are signing. My motto of "Consumer Be Aware" encourages you to learn ahead of need. "Buyer Beware" is a before-you-sign alarm that may be too late—and expensive.

Published: October 20, 2010

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Futurist and Strategist PJ Wade is "The Catalyst" - intent on "Challenging The Best to Become Even Better." PJ earned this title by translating the dynamic impact of Boomers and their multi-generation families into relevant insights that start people thinking and taking action—in business and in life. Author of 8 books and more than 1800 published articles, PJ encourages individuals to become their own futurist. PJ writes and speaks about the insight, knowledge and solid decision-making skills that professionals and their clients need to live and work in this vortex of change. For instance, since PJ knows that home is headquarters for the new decades-long "unretirement," she wrote the popular book "Reverse Mortgages: Best Friend, Worst Enemy...Your Choice!", which is filled with suggestions and cautions on protecting, building and managing home equity. Her new business book, "What's Your Point?: Cut The Crap, Hit The Mark & Stick!" will be published in 2012. As The Catalyst, PJ provides strategic communication, client appreciation and advanced education services to the financial, tourism, lifestyle and service sectors - and the clients they serve. A frequently-quoted financial and business commentator, PJ is a thought-provoking strategic speaker who offers practical, real-life suggestions on leaving "the box" behind and embracing Forward Thinking - a talent she regularly demonstrates in this column. For more on keynotes, blogs, books and information on a range of 21st-Century topics, visit TheCatalyst.com.