Beware of the Bait and Switch Mortgage Strategy

Beware of the Bait and Switch Mortgage Strategy-150x150The real estate market has its share of crooks and scammers just like any other industry. Unfortunately, the ones getting scammed are usually hard working Americans who just want, like most people, to become home owners. Becoming a home owner is difficult and expensive enough without getting tricked by lenders and mortgage brokers, so you will have to pay a lot of attention when buying a home, especially if it is your first time doing it. If you are not careful, you can end up with a mortgage that is much more expensive than what you can afford, and you will have to struggle to make your mortgage payment each month, or eventually have to abandon your home.

What is the Bait and Switch Mortgage Strategy?

When buying a home, you can encounter dangers at every corner: from thieves posing as lenders or lawyers, who usually prey on the elderly, to the old bait and switch. Bait and switch happens when a customer is offered something for an attractive price, also known as the bait, which will no longer be available when the customer decides to go ahead and make the purchase. After the customer realizes that the initial offer is no longer available, he or she will be presented with a new offer, with less attractive terms, also known as the switch.

Lenders usually do the bait and switch by advertising low interest rates in order to get many potential home buyers interested. These interest rates are promoted in newspapers, on TV, on the radio, on billboards and posters, but, when the customer shows up and applies for a mortgage, he or she is told that those were last week’s rates or that they are reserved only for those with very high credit scores and a very good financial situation. Of course, because bait and switch is illegal, lenders disclose all this in the small print, which is usually too small to read in a newspaper, moves too fast to be read on TV, or is simply disregarded by most people who are looking for a mortgage.

The truth is that interest rates change too often for the advertisements to be truthful. Commercials on TV and the radio are very rarely modified to display the correct interest rate, so they may run for a couple of months advertising an interest rate that was offered a long time ago, and the rate can be much higher at the present time than it was before. Even live interviews advertise rates that are at least a few days old. When home buyers call the lender to inquire about the low interest rate, they find out that the rate is no longer available, but are offered a new rate. This new rate won’t be as great as the one that is advertised, but is usually not that much higher. However, a small increase in interest can mean thousands over time, so make sure that you understand how much more you will be paying before taking the lender’s offer. Ads in newspapers are also at least one day old because it takes at least one day for the newspaper or magazine to get published.

In a perfect world, interest rates would not be advertised unless they were actually available for everyone. While some lenders are truthful when advertising interest rates, most take advantage of things like fine print and are just happy to get customers interested, even though they are unable to offer what they promised. Unfortunately, many home buyers fall for the bait and switch due to the fact that many lenders are doing it. When searching for a mortgage you should give yourself time to shop around and find what’s best for you, and not let lenders use the bait and switch mortgage strategy on you. If you are not satisfied with a lender’s offer, always be ready to turn around and walk away.

Building a Home: Should You Lock-In Your Mortgage Rate?

Building a Home-Should You Lock-In Your Mortgage Rate- 150x150New homes sales have rose significantly in the past few months, but it looks like the numbers are based on signed contracts instead of closings. This means that some of these homes that are recorded as sold may have not even been built yet, and may never be. Contracts were signed with interest rates at record lows, buyers were unable to lock in the interest rates, and are now watching interest rates increase. This will probably result in a significant number of cancellations.

Why Lock-In Your Mortgage Rate

When locking-in interest rates, most home buyers try to find the best time to do it so they get the best deal. While interest rates cannot be accurately predicted, there are trends that you can keep your eye on in order to better approximate which way the rates are going.

If you decide against locking in your interest rate, and would like to wait, there is a chance that the rate might go down, but there’s also a chance that it might go up. Interest rates don’t normally increase significantly over a short period of time, but a lot can happen until closing, and you could end up with a much higher rate on your mortgage loan. Also, depending on your financial situation, even that really small increase in interest can make it much harder to keep up with mortgage payments over time.

Locking-in your mortgage interest rate will guarantee that the interest rate you and your lender agreed upon will be applied to your mortgage loan, regardless of the changes in mortgage rates that will happen until closing. What many borrowers don’t realize is that they are not tied to that particular lender if they lock-in their interest rate. If rates decrease before closing, the borrower can go to a different lender. The threat of losing a customer might even determine your current lender to renegotiate a lower interest rate.

If you are satisfied with the current mortgage rates today, you should lock it in. This will protect you against any future interest rate increases and give you more peace of mind than if you would choose to risk and not lock-in your mortgage rate.

Locking in the Mortgage Rate When Building a Home

On regular mortgage loans, the interest rate can be locked right after the application is approved. The closing will usually be one or two months later, so there won’t be any major changes in interest rates, unless something extreme happens with the United States or global economy.

Locking-in an interest rate on a home that is not built yet or currently being built is much harder because the lender will not know precisely when construction will end. Borrowers apply for a mortgage, but are only able to lock in their mortgage several months later. Interest rates can fluctuate significantly in several months, putting borrowers at a great risk of paying significantly more on their mortgages. In order to lock-in interest rates, you will most likely have to pay points on the mortgage, which can add up to thousands of dollars.

The conclusion is that you should lock-in your mortgage rate when building a home if you are satisfied with the interest rate that is offered to you. You might not be able to lock-in the rate unless you pay mortgage points, so you have to decide if you want to spend that money to lock-in the rate or invest it somewhere else. Locking-in the mortgage rate when building a home will give you peace of mind, but you should always look at all the factors before deciding whether you should do it or not.

Refinancing Your Home: The Complete Process

Refinancing Your Home-The Complete Process- 150x150Refinancing your home at the right time can bring you great financial benefits, but the process can be a little intimidating for those who are refinancing for the first time, and even for those who have done it before in the past. Changing your mortgage loan to a different loan with different terms can get a bit confusing, and you might be afraid not to make any mistakes and end up doing the exact opposite of saving money.

There are consultants who can guide you through the refinancing process, and it’s not a bad idea to use them, but it’s important that you understand how refinancing works, from deciding to refinance to actually taking out the new mortgage loan. Understanding the refinancing process will help you avoid making simple, but expensive, mistakes, which can end up ruining your plans.

Deciding to Refinance

Home owners generally refinance when the interest rates are lower than they were when they took out their mortgage loan, but interest rates should not be the only deciding factors when you consider refinancing. First of all, the advertised interest rates are usually reserved for those who meet some very strict requirements, like having a perfect credit score. Anything less than a perfect credit score and you will find that the interest rate that you’ll be required to pay on your new loan is not that attractive anymore. Secondly, you should not be blinded by the low interest rates that lenders are willing to give you. The closing costs of refinancing can be very high, and might make the overall value of your new mortgage loan even greater than the value of your current loan.

Getting Prepared to Refinance

If you have decided that refinancing is the right step for you, and you will be saving money by doing it, then it is time to get prepared. Like most mortgage loans, refinancing will require a good credit score and a significant number of documents. Before talking to a lender, you should check your credit score, and make sure it’s in good shape, without any inaccuracies. You are entitled to one free credit report check per year, and you should report any erroneous information to the credit bureau. Also, having some of the paperwork ready before applying for a refinance will save you a lot of running around, and it will make the whole process go faster and smoother.

Choosing the Right Refinance Loan

There’s no perfect mortgage loan that will benefit everyone. Depending on your financial situation and many other factors, you should closely look at all loans that will be made available to you and decide once you find one that meets all your requirements. For example, you may want a lower monthly payment, in which case you should look at 30-year fixed-rate loans. Alternatively, you may want to pay off your mortgage sooner, in which case you should look at 15-year mortgages.

Applying for the New Mortgage Loan

Like we’ve mentioned earlier, preparing certain documents, such as personal tax returns, bank statements, pay stubs, and others, will make the refinance application process go by very quickly and, in some cases, you can even apply over the phone. The quicker you submit the required information, the faster will your new mortgage loan be approved.

Appraisal and Approval

After submitting your application, you will normally have to get your home appraised by a home appraiser. These appraisals usually cost a few hundred dollars and are paid by the borrower. The home appraisal is required in order for the lender to find out how much your home is worth and if you have enough equity in your home to support the new mortgage loan. All your paperwork, including the appraisal, will then be reviewed by the lender. If the lender comes to the conclusion that you are able to repay the new loan, your refinancing loan will be approved.

Locking in the Interest Rate

Once your new mortgage loan is approved, you will have the choice of locking in the interest rate or letting it float until closing. By locking in your interest rate, you are protected from an increase in interest rates before you close on the loan. If you don’t lock the interest rate, there is a chance that the rate on your new loan might increase, but there’s also a chance that it might decrease by closing time.

Signing the Loan Documents and Closing

At closing, you will be required to sign all of the loan documents. You should carefully review each document before signing, making sure they contain everything that was agreed upon. When closing, you will also be required to pay various closing fees, which can be pretty costly. However, some of these closing costs can be reduced at your request, or even waived, if you have a good relationship with your lender.

Refinancing is a pretty straight-forward process once you understand it, but you should still pay attention to the details. Refinancing can turn into a costly nightmare if you don’t carefully take all of the aspects into consideration. Doing your homework before refinancing will ensure that the whole process goes by smoothly and making your mortgage payments will be much easier.

Building Your Own Home? You Can Take Out a Mortgage!

Building Your Own Home-You Can Take Out a Mortgage-150x150If you are ready to become a home owner, but choose to build your own home, you can do it by taking out a type of mortgage known as a construction loan. This type of mortgage loan will allow you to use the borrowed money to build a home. The money will be paid by your lender in stages, based on what stage the construction of the home is in. The lender is involved in the building process for as long as construction takes, and will review the project at various stages.

Borrowers must also apply and get approved for a regular mortgage loan before they can be granted the construction loan. The mortgage loan and construction loan are usually bundled together in a construction to permanent loan, making applying and approval much easier, because you are essentially requesting only one loan.

Steps to Taking out a Mortgage Loan for Building a Home

Like with any other mortgage loan, there are several steps that you need to follow in order to receive a construction loan: find the best option for you, acquire the funds,  and begin building your home. Here are the most important steps to taking out a mortgage for the construction of a home:

  • Find out which type of loan works best for you. Similar to conventional mortgage loans, construction loans come with various options, like fixed-rate or adjustable-rate loans, long term or short term loans. Two popular options are taking out a short term, for example 1 year, loan which you can refinance into a regular mortgage after the construction has finished, or the construction to permanent loan which bundles the construction loan and the regular mortgage loan into a single loan. The second option seems more attractive because you’ll only be paying closing costs one time, unlike with refinancing when you will have to pay closing costs all over again.
  • Get pre-qualified. Getting pre-qualified will allow you to determine how much you can afford to borrow and what your payment will be. Also, before giving out a construction loan, your lender will most likely need to know what your intentions are, why do you want to build a home or if you plan on living in the home after the construction is finished. Depending on your plans and the lender, you may receive various interest rates, and have more or less options.
  • Shop around. Construction loans are a lot less popular than conventional mortgage loans, so you might have a hard time finding one, or finding a loan that will suit your budget and requirements. The best way to find a good construction loan is by shopping around and comparing offers from various lenders who are willing to give out this type of loan. Alternatively, you can hire a construction loan broker who works with several banks, and who can help you find what you’re looking for much easier.
  • Submit your loan application. After finding a good loan, from a lender with enough experience in construction loans, it is time to submit a loan application. Like applying for a conventional loan, you will have to meet certain criteria, and submit additional info about your construction plans. You will also be given the option of locking in the interest rate, or letting it float hoping that the interest rate will decrease before closing.
  • Sign a building contract with a home builder or contractor. The contract between you and the builder is included in something called the builder’s package, which also includes things like the builder’s resume, an item cost breakdown, and a list of all the required materials.
  • Obtain construction insurance. Builders are not required to be insured, but the whole process of obtaining the construction loan will go much faster if the builder has insurance. There are three types of insurance that a builder can have: course of construction, general liability and workman’s compensation.
  • Close on the loan and start building. If you have all the required documents and meet all the criteria, there is no reason why your lender should deny you the construction loan. The only thing left to do is pay the closing costs and start building.

Taking out a mortgage loan in order to build a home is a great opportunity for both people who want a home to their own specifications, and for investors who are looking to build a home and sell it for a profit. The amount that can be borrowed and the interest rates will probably differ between the two cases, but, with some research and proper understanding of how construction loans work, this type of loan can be a very advantageous option.

When Should You Lock-In Mortgage Interest Rates?

House Lock KeyAfter spending weeks or even months shopping for a mortgage loan, you have finally found something that suits you: a mortgage loan with a great interest rate and low upfront costs. Fast forward a few weeks and right before closing on the loan, the interest rate increases all of a sudden. This isn’t the lender trying to scam you; it’s just the way things work. The latest mortgage rates can fluctuate, sometimes significantly, from one day to another. This can be avoided by locking in your mortgage interest rate.

What is a Mortgage Interest Rate Lock?

By locking in your interest rate, you are guaranteed the interest rate that your lender has quoted you when you applied for the mortgage loan. Even if your loan application is still being processed, by locking in the interest rate, you will make sure that you won’t be caught by surprise if the rate increases in the near future. Of course, the interest rate can also decrease, which means that you will be missing out on a lower rate if you lock-in early.

The lender will lock in the interest rate for a specified period of time if you ask him. Typically, the interest rate can be locked for periods between 15 and 60 days. The shorter the lock period, the less risk there will be for the lender, meaning that you will receive a better interest rate.

Steps to Locking-In a Mortgage Interest Rate

A mortgage interest rate lock-in can prove to be very beneficial in case the interest rates increase while your loan is being processed, but it can also be a disadvantage to you if the rates decrease. No matter when you decide to lock-in the interest rate, you should always know how this is done. Here are the steps to locking-in your mortgage interest rate:

  1. Make sure you understand what the difference between an interest rate quote and a rate lock is. The interest rate quote is the estimate given by your lender of what your rate will be. The rate quote will be affected by any changes in interest rates that happen on the market. Your income and credit score can have an influence on the rate that you were quoted, meaning that the interest that you will be paying on your mortgage will most likely be different than the percent that your lender has quoted. If you lock-in your interest rate, the rate won’t change during the lock-in period, no matter what happens in the market. 
  2. The loan process can take a fairly long time, so having all of the necessary documents ready is very important when locking-in your interest rate. Rates can be locked for 2 months or even more, but if the loan is not closed during that period, the interest rate lock expires and the rate that was agreed upon is no longer valid. By doing a little research, you can find out how long processing a loan typically takes in a certain area and plan accordingly.
  3. The interest lock-in must be in writing. In the written agreement, all important information much be enclosed, such as your name, your lender’s name, the loan amount, the interest rate that is being locked-in, and the lock-in terms and fees. Make sure you read and understand everything that is written in this document, including the fine print.
  4. Some lenders provide an option that helps you get a lower interest rate if it becomes available during the lock-in period. If your lender has this option available, you should take it, but be aware that you will most likely have to pay a fee, and you will only be able to use this option once. This option may also force you to take a higher interest rate if the rates increase.

When to Lock-In the Interest Rate

You can lock-in your mortgage interest rate as soon as your loan is approved for the first time, but most people will wait until they find a home. There could be a few weeks between the time you get approved for a loan and the time when you actually find a home that you are willing to buy, so locking in only after that will reduce the chances of the lock-in expiring before the loan is closed. Also, a larger interest rate lock costs more, with 60 days locks costing around 1 percent of the total loan amount.

Because interest rates can increase or decrease at any time, there is no perfect time when you should lock-in the interest rate. The only way you can predict an interest rate increase or decrease is by researching forecasts, but interest rate forecasts are not always accurate.

Locking-in early is generally the better choice, if you are happy with the interest rate that your lender has quoted you, especially for those whose budgets can be severely affected by even a slight increase in interest rates. What is most important when locking-in an interest rate is that you work with your lender to determine if your loan will be able to close before the interest rate lock-in period expires.

Deciding when to lock-in the mortgage interest rate is not an easy choice to make and can end up causing you a lot of headaches and stress. Locking-in before the interest rates increase is great, but they might also decrease, in which case you won’t get to secure the lower interest rate. On the other hand, not locking-in before the interest rates increase will cause you to lose money, and can even cause you to not qualify for the loan anymore. No one can know when the ideal time to lock-in your interest rate is, so if you are satisfied with the interest rate that you receive initially, it is better to lock-in early, rather than take the risk of rates going up in the future.

Putting a Lock on Mortgage Interest Rates

lock -in rates 150x150Once a potential home buyer has zeroed in on the desired home or lending source, has factored in the closing costs and monthly payment obligations, and has scouted the most affordable interest rates that fit their respective budget, it is now the time to lock in that rate to make the whole process financially feasible. With a careful eye watching rate fluctuations, which can change dramatically and quickly, even a single percentage, can affect the entire course of events. Naturally, the rate moving up would be the primary concern, costing potentially thousands in added interest over the term of the mortgage. Therefore, getting a ‘lock’ put on the interest rate offer is the best strategy. Be sure to check out current mortgage rates before you meet potential lenders!

Strategies for Locking in Your Interest Rate

Locked until Closing

During the initial phases of the loan application process, acquiring a rate-lock from the lender specifies and secures an interest rate that will be applied to the mortgage terms during the approval process. The rate is held at the quoted percentage for the duration of the time-frame required for final loan approval, and dependent upon the borrower meeting all the necessary qualifications for the loan. The lock period is usually from 30-60 days, depending on the market, or as long as the loan process takes to reach closing.

Get the Rate in Writing

The most important method of security is to get the lender to stipulate each aspect of the rate quote and loan terms spelled out in writing. A borrower should never assume that the lender has in fact ‘locked’ the rate, simply because there is a chance the rate is being ‘floated’ to allow for a better yield spread premium, meaning that the rate will decrease in the lender’s favor during the approval process, or that a rate could have been ‘misquoted’ during initial negotiations. In addition, getting the rate-lock in writing eliminates the chance of the lender or broker altering the original loan specifications, like raising margins, adding points or pre-payment fees, changing the interest rate index the loan is tied to, or perhaps even which loan program the original offer was categorized.

The more research you do before speaking to lenders, the better. If you go in prepared, you will ensure that you are are able to lock-in the lowest rate possible that you are qualified for.

How Are Interest Rates Set?

interest ratesAfter pouring over the mortgage rates posted all over the internet, after shopping around to the local banks and mortgage brokers, after watching the economy plunge the housing market into free fall, any potential home-buyer must wonder who or what determines how the interest rates are set. The effect a credit score has on a loan approval almost seems secondary compared to understanding how the big ‘interest’ game is played, and how it ‘trickles down’ to the everyday consumer’s ability to find a decent place to live, and the means to afford it.

It turns out, the lender or broker has little to do with how the mortgage interest rates are determined. They simply control who finally gets a favorable nod, and on what terms. Mortgage interest rates are played out on a much bigger game board, and are primarily manipulated on what is known as the secondary market, where mortgages are bought and sold, much like a game of Monopoly.

Fannie, Freddie, and the Wizards of Wall Street

A few decades ago, the federal government sought to stabilize the mortgage lending process, and created two enormous mortgage investment entities called Fannie Mae and Freddie Mac. These monoliths, along with other mortgage investors, purchase the loans that the local lenders and brokers arrange, gather them into portfolios or wrap them up with other loans into things called mortgage backed securities. From there, these bundles are sold to Wall Street, mutual fund managers and other financial powerhouses, to be traded just like Treasury bonds, securities and other financial instruments. This process is what actually determines the interest rate a potential homeowner will pay to put a roof over their heads.

From that point, and just like the stock market, these securities are tied to the higher yields the investors demand when the economy is good, which pushes the local lenders to raise the local interest rates. When the markets take a dive, so do the interest rates, due to the higher demand from the investor side of the equation. And so it goes.