How to Avoid Getting the Wrong Home Loan
(After All, It's Your Money)

4. Watch Out for Bait-and-Switch Tactics.

This happens all too often. You get excited about a loan proposal—you believe you achieved just the rate you had hoped for—you get to the point of signing your final documents—but what's happened? The rate and/or terms you are now shown are not even close to what you were originally quoted! You call your loan officer and hear that he or she tried to get you the better rate, but your credit didn't quite qualify. Out of frustration, you sign the documents to be done with the entire agonizing process. You have just been victimized!

Sadly, not everyone in this business is entirely ethical. They will tell you anything you want to hear just to get a loan started—and then try to switch you along the way, knowing there is a good chance you will sign anything at closing just to get the process finished. If you are trying to get cash out of your home, they know there is an even better chance they can stick it to you, since your need for the cash may override your patience in seeking better terms.

Don't be a victim of these unscrupulous tactics! No one should have to endure this.

Have your credit scores deteriorated since the beginning of the loan process? Did the value of your home appraise at a different price that you anticipated? Did you indicate a higher income level than you really earn?

Well, if nothing has changed you should be getting the same rate you were originally quoted. The only other answer is that you have become a target of the old bait-and-switch tactic. Don't let this happen to you! Find someone you can trust at the outset.

There is one exception to this rule. If your loan officer is putting you into what is commonly referred to as a sub-prime loan, the rate may be somewhat different than what you were originally quoted. The reason for this is that these types of loans cannot be locked until a few days before closing. In a market with fast moving interest rates, you may find that the rate has changed. The good news is that these types of loans usually do not change rates often, usually just 1 or 2 times a month. However, your loan officer should be keeping you abreast of these changes before you sign your final documents.

5. Are Discount Loans Really Cheaper?

What about "discount" lenders? We see them on TV—we hear them on the radio—those who claim they will do your loan for no points or no fees. Well, in the absence of fees, you will normally be charged a higher rate. Yes, the inverse is true as well. As a rule of thumb, if fees are higher, the rate is usually lower.

At the request of his accountant, a client called me one day wondering about some of the fees on his loan. "I am concerned that I might be paying a little too much. My accountant just got a similar loan with fewer fees." I asked what his accountant's rate was. It was 1/4% higher than my client's. To make a long story short, the accountant's total payments throughout the life of his loan were nearly $20,000 more because of the 1/4% higher interest rate. This made the accountant's loan a pretty bad deal compared to my client's loan.

Sometimes, it does pay to get a little higher rate for less or no fees. A good loan officer can help you do the math. As a rule of thumb, interest rate vs. fees questions are answered by how long you intend to occupy the property, or by how long you think it will be until you refinance again. If you are going to sell the property in the near future, but still need the money, there is a good chance that lower fees and a higher rate might make more sense. On the other hand, if you plan to keep the property for a long time, consider paying more of the fees outright and getting the lowest rate possible.

By the way, when we talk about paying the fees, don't get frightened. You actually pay very little out of pocket—usually just a small appraisal fee. Generally, all other fees are rolled back into the loan.

Concerning what may appear to be unbelievable deals you read or hear about, once again buyer beware. If you are considering a 30-year fixed-rate mortgage, be cautious about advertisements that appear to be too good to be true. Ask yourself: are you really looking at a competitive ad for a 30-year fixed-rate mortgage? If everyone else in town is advertising 30-year fixed rates at 5.50% and someone else is advertising 4.50%, you may not be comparing apples to apples. A 5/1 or 7/1 ARM loan is amortized over 30 years, but is only fixed for 5 or 7 years (then it becomes a variable rate loan for the balance of the loan).

This is a big difference. Be careful. I will talk more about 5/1 and 7/1 ARMs later in this booklet. I have found many clients who thought they had a 30-year fixed-rate loan, but actually had a different product altogether.

One day while driving home from the office, I heard an ad on the radio for a 5%, 30-year fixed-rate loan. I thought: this sounds pretty good—especially since I knew that the lowest rate then available was 5.625%. So, I called this lender and found out that they were charging 5% to 6% in points just to get this rate. In other words, on a $200,000 loan, you would be paying $10,000 - $12,000 in points just to get the loan. Their "great deal" was no deal at all!

6. Understanding Principal and Interest

Every time you make a payment on your mortgage, some goes toward paying down the loan balance (a.k.a. the principal) and some goes toward interest. When a mortgage is new, most of a payment goes toward interest, with very little going toward principal. As the loan matures, the reverse begins to take place, with more money going toward principal and less toward interest.

7. When I Refinance, How Can I Know What Interest Rate I Will Qualify For?

This is one of the hardest questions to answer. It's kind of like asking how much should I pay for a car. Cars come with different features for different buyers, and in all different price ranges.

Here are some things to consider. There are two types of lenders, prime and sub-prime. For simplicity's sake, let's just say that the prime lenders approve loans from borrowers with good credit and acceptable debt and LTV (Loan To Value) ratios. Sub-prime lenders approve loans for all the rest.

You may think the following information is not particularly important. However, these are facts about which you should be aware.

First, be acquainted with your credit worthiness. Do you know your credit rating? This is a number that identifies your credit worthiness to any lender who is considering your request for a loan. The scores run from 350-850. Not surprisingly, the higher the score the better. If your score is over 700, you should do well. If your score is between 620-700, you will probably still do well, depending on your debt ratio and LTV (more about that below). You can easily find your score by going online with any of the major credit bureaus. Check the following links:
www.experian.com
www.equifax.com
www.transunion.com

For a fee, they will provide you a complete report (by the way, we check your credit for free as part of our service with your loan package). If you generally have paid your bills on time for the past couple of years, you probably have a good score, so if you would rather not pay a credit bureau to check your credit, you can skip this step. If your credit could be better, do not fear. There are often ways to get it cleaned up for very little money ($20-$50). We will discuss this in more detail later on in this eBook.

Next, figure your debt ratio and LTV (explained more in more detail later). This will also have an effect on the rate you might get.

Generally speaking, you want your debt ratio under 50%—preferably under 45%. (However, if your credit is really good, there are often ways to work with debt ratios that are much higher). It's easy to figure. Start with the principle and interest on your proposed loan. Add in monthly homeowners' insurance, homeowners' association fees, and your monthly property tax bill.* Next, add the monthly minimum payments of all your credit cards, automobile loans, appliances, furniture, etc. to the previous total. Take this grand total and divide it by the gross income for yourself and co-borrower (such as your spouse). This is your debt ratio.

* (If you pay property taxes annually, just take this amount and divide it by 12.)

So, in the above example, the total monthly expenditures are $1,783.00. If the monthly gross income is $5,000.00, then the debt ratio is $1,783.00 ÷ $5,000.00 = 36%, well within acceptable limits.

Now, how do you calculate the LTV, or Loan To Value ratio?

This is far simpler to figure. Just add to the balance of your existing mortgage, any 2nd mortgages and any amount of cash out that you may be looking for. Take this total and divide this by the current value of your home. As a general rule, you will want this LTV to be below 80%. The LTV can be higher (in fact, there are ways to go to 100% LTV or more) but it may cost a bit more in the form of higher interest and/or mortgage insurance.

So, if we have a borrower with the following:

What does all this mean? If you have a good credit score, your debt ratio and LTV are low, then you are going to borrow money at the lowest rates. On the other hand, if your scores are low, and/or your debt/LTV ratios are high, money may cost you more in the form of higher interest rates.

Now that you have some idea about where you may stand from a credit rating perspective, you are ready to start the loan process. As discussed previously, work with a loan officer with whom you are comfortable. He or she should be willing to provide a "Good Faith Estimate" explaining all fees and costs. Move on to someone else if you cannot get a "Good Faith Estimate" handed to you, faxed, or emailed quickly. Chances are, you would not have liked what you would have seen in print, anyway.

Beware. In a low-interest rate environment, companies pop up every day that offer what appear to be wonderful deals. Often, "offering" is all you will see. Getting a great offer on the phone or during your first visit, only to be dealt a big blow by being presented with a terrible deal at closing, is no deal at all. As stated earlier, often times this unethical way of doing business is targeted toward those trying to get cash for debt consolidation or household improvements. Statistically, many will take a worse deal when cash is needed for bills or improvements. Deal with someone that is reputable!

8. How Can I Estimate My New Monthly Payment without a Mortgage Calculator?

Easy. Use the following chart to figure your payment (within a few pennies or so). Just figure your loan amount, find the interest rate you think you will be able to obtain, multiply by the multiplier, and you have your new monthly payment.

Example: $225,000 loan amount at 6% interest for 20 years (240 months on schedule), would be $225,000 x .007164 = $1,611.90 per month. It's that easy! We also have a mortgage calculator on our web site.