Part 2: Five Smart Mortgage Steps

Written by Posted On Friday, 10 February 2023 00:00

In Part 1: Learn About Mortgages BEFORE You Sign Up, Three of the Five Smart Mortgage Steps were explored in detail. Now, we’ll shine the spotlight on the remaining Two Smart Mortgage Steps.

Five Smart Mortgage Steps

A mortgage is the largest debt most real estate buyers and property owners incur and a debt that most of them know the least about, so many miss out on opportunities to save money as they borrow:

Part 1:  Learn About Mortgages BEFORE You Sign Up

1. Beyond Interest Rates

2. Start Now To Prepare For Mortgage Decision Making

3. The More You Learn, The More You’ll Want to Know

Part 2: Five Smart Mortgage Steps, Continued

Mortgage interest is the cost of borrowing money from a lender, for a specific period of time, to buy or refinance real estate. 

The lender aims to accumulate as much interest or profit as possible while the borrower would prefer to pay as little interest as possible. Lenders do everything they can to earn maximum interest for as long as possible; however, borrowers are usually not as intent on paying less interest beyond starting out with a low interest rate.

4. Caution Selecting a Lender

Avoiding high pressure sales, scams, cons, and fraud should be a no-brainer, but your success with this relies on you staying skeptical, even suspicious. Not every offer of mortgage financing, even the friendliest ones, can unquestioningly be relied on or trusted.

Don’t let your guard down while you search for and sign up with the best possible lender. You may want to relax your guard with mortgage lenders and professionals, whom you feel you should trust and whom you hope will put your interests before their own, but you can’t afford to blindly assume you’ll receive ethical behavior. Stay skeptical! Ask questions and listen to the answers (ideally, this means recording conversations or taking notes). 

• Read before you sign: You can understand mortgages even if you are not great at math. Persist in requesting an understandable explanation until you fully grasp what is going to happen, what you are agreeing to do, and what this will cost you. Once you sign, you have made an expensive commitment; before you sign, you are learning what the mortgage contract legally binds you and the lender to do and not do. Take the time you need to be sure.

• Who is involved?: In Part 1: Step 3, you were presented with a number of HUD-approved counselors and agencies to assist you with locating legitimate, credentialed mortgage and housing professions to help you with the wide range of mortgage issues that homeowners and buyers face. Licensed mortgage professionals like members of the National Association of Mortgage Brokers are excellent resources for you. Use the expertise of mortgage professionals to your advantage. The best of them love talking about mortgages and helping borrowers understand how these financial tools work and how costs can be managed.

Caution: > If something seems too good to be true, be very skeptical and check further. For example, don’t pay up-front fees or special charges to non-lenders.  

> Avoid mortgage offers that do not come from accredited professionals since they could be scams or fraud. Verify the credentials of those involved in your mortgage work and keep a copy of their business card or contact information for future reference.

  • Signing up before you fully understand what you are getting into can be unnecessarily expensive, for instance:

1) ARM or adjustable rate mortgages and interest-only mortgages offer financial advantages when rates are stable or falling, but can become expensive if interest rates are on the rise.

According to the Federal Deposit Insurance Corporation, “ARMs or adjustable-rate loans, also known as variable-rate loans, usually offer a lower initial interest rate than fixed-rate loans. The interest rate fluctuates over the life of the loan based on market conditions, but the loan agreement generally sets maximum and minimum rates. When interest rates rise, generally so do your loan payments; and when interest rates fall, your monthly payments may be lowered.” 

Caution: In 2023, a change will occur to ARMs that should be considered before then.

2) According to the Mortgage Bankers Association, forbearance “is a temporary pause of your mortgage payment. The payments are not forgiven; you will be required to repay any missed payments. Ask your servicer about your options for making up the missed payments after the forbearance period is over BEFORE you choose to move forward with a forbearance plan.” This payment delay can prove very expensive.

• Home buyers and sellers may be susceptible to lenders' often game-based online “Experience” pathways. These sales funnels and marketing tools appear to put the borrower in control of researching mortgages by letting them choose a digital path to follow. In fact, users are exploring only that lender’s products in an elaborate sales context. Borrowers are not discovering all the mortgage products available in the marketplace nor are they necessarily being matched with the overall best products for their needs.

Borrowers are inside the lender’s system, disclosing personal information and preferences, busy believing what the lender wants them to. For example, as borrowers go through online pre-qualifying, applying for a new mortgage, or inquiring about refinancing, they reveal a lot about themselves and unwittingly acquire the lender’s bias and play by the lender’s rules and terms.

Be skeptical and consider talking to a housing counselor or mortgage professional to get your bearings about mortgages before you shop online or off to find the best lender for your needs.

5. Think ahead: Pay the debt off faster

An online mortgage calculator quickly reveals how reducing the principal by even a few thousand during the life of your mortgage loan can save a lot of money otherwise wasted on interest. 

When you receive a “friendly” offer to lower monthly payments, skip a payment, or extend the amortization period, you are giving the lender much more interest over time, even though you may feel they’ve done you a big favor!

The amount of interest paid can be reduced, for example, by arranging:

1. A shorter mortgage term to accelerate repayment

2. Extra principal-interest payments through prepayment or paying down early on renewal

3. Additional principal-interest mortgage payments, even adding one more per year will reduce interest costs

4. A significant lump-sum payment to reduce the principal. Interest rate and term remain unchanged, but re-amortization reduces monthly payments. The lump sum may come from a real estate sale, an inheritance, or a windfall.

Use Glossaries to expand your mortgage vocabulary:

Expand your mortgage vocabulary and you’ll understand mortgage dos and don’ts more quickly. Googling individual terms to learn their meaning can have you accepting definitions without understanding the bias of the source.

Explore compiled Glossaries of Mortgage Terms and How-to Guides to understand the complete context of mortgages. Browse the lists of terms and you’ll see how all the mortgage “pieces” fit together.

Here is a sample of definitions and Glossaries:

Principal: “The principal is the amount of a mortgage loan that you have to pay back. Your monthly payment includes a portion of that principal. When a payment on the principal is made, the borrower owes less, and will pay less interest based upon a lower loan size.” From the Consumer Financial Protection Bureau’s Mortgages Key Terms and Mortgage Basics

Prepayment: “Prepayment is an amount paid to reduce the principal balance of a loan before the principal is due.”

  • Note: “Prepayment penalty: A penalty assessed by some lenders if a loan is paid off before the specified term. This is a lump-sum amount due and payable in addition to the loan balance, and is usually limited to the early years of a mortgage.” From Bank of America’s Glossary of Mortgage & Lending Terms

Title: “The legal evidence of ownership rights to real property.” From the National Foundation for Debt Management’s Glossary of Mortgage Terms.

Caution: Always consider the compiler of a Glossary, “Borrower Experience,” How-to Guide, or marketing material to reveal bias, motives, and hidden agendas just as you must do with all online searches on which you rely.

Will you be mortgage-ready before you want to, or have to, sign a mortgage contract and start paying interest?

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PJ Wade —       Decisions & Communities

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