Mistakes to Avoid When Shopping for a Mortgage
It is a temptation for those shopping for a mortgage to look for the lowest monthly payments, but that is not always the best tactic. 8 out of 10 homeowners are looking to refinance their mortgages now. Here are some of the mistakes made by mortgage seekers:
Adjustable-Rate Mortgage (ARM)
These are so tempting because you start off with a low-interest rate for two to five years. This allows people to buy more home than they would normally afford if the rates were higher. When the rate resets at the end of the period time was that you could take equity out of your home and refinance to a lower rate. However, in this day and age when there is no equity, you cannot refinance and are left with a huge increase in your monthly mortgage payments.
At the height of the market, lenders were offering no-d0wnpayment loans. The more you put down on the home the more equity you have in it and the more tied you are to that home and the more likely you are to continue payments to stay in that home. When the market turned, those with little or nothing in the house who found themselves owing more than it was worth just walked away. They had nothing to lose because they were effectively paying rent.
No Doc Loans or Stated Income Loans
Again, at the height of the market lenders were offering loans to people without much paperwork. If you had a pulse you got a loan. Many people who just exaggerated their income didn’t even have jobs and soon found that they could not keep up with the payments. Bankruptcy and foreclosure came next.
Reverse mortgages are available to people 62 and over. The equity in the home is used to pay the owner a monthly stipend or one lump sum like an annuity. These mortgages come at a cost. There are high origination fees, mortgage and title insurance, appraisal fees, and other miscellaneous costs that take away some of the equity, and the bank now basically owns your home. The surviving family only gets the remaining equity after the mortgage, fees, and interest have been paid off.
30 years is not the longest mortgage that you can take. There are 35 and 40-year mortgages which allow you to buy more house for lower payments. These mortgages are good for a young person who will be staying in the home for 20 years, but for anyone else it does not. The interest rates are a little higher than on a 30 year mortgage and this adds up to a lot more interest paid over a 40 year period because banks are going to want the 10 extra years covered at the back end. Also, there will be less equity in the home. The first 10-20 years of payments will pay down the interest so the borrower will not find it easy to move.
Negative Amortization Mortgages
Again, in the height of the market, there were all sorts of come-on mortgage products offered, interest-only mortgages which were about 20-30% less than regular mortgages. You could basically say how much you wanted to pay every month and live in your home. However, a balloon principal payment became due and the borrower could not afford to pay any more. Negative amortization products, instead of building equity were building debt.
Fortunately, or unfortunately, the banks are being overly conservative with their lending practices today to the point that getting a loan is not an easy process. We just need to make sure that we don’t fall back into the old ways in the future.