Refinancing or financing your home can be stressful. Let’s face it, the biggest transaction you will probably ever make is purchasing and financing a home. I hear a good number of horror stories about refinancing. I’ve even had some of these tricks played on me. Fortunately I knew what to do. Here is what you should know about financing your home.
Do not accept a lender solicitation you got in the mail just because it looks good. Always do your due diligence and get competing quotes from reputable lenders. Usually a lender that woes you is not offering the most competitive terms. In addition, don't pursue the lender offering the lowest rate on sites such as bankrate especially if you've never heard of them before. These are the firms that are most apt to bait and switch the loan terms at the last moment or pad the closing costs. So watch out and do your home work.
Always watch out for the old bait and switch scam. Typically this is what happens. You complete the loan application and a few days later the loan officer confirms your application has been accepted. However, the loan is not at the initial rate and terms discussed, a fact the broker conveniently forgets to mention. Many people don’t realize that the terms have been changed until they are signing documents at closing. It is important to receive a copy of the terms and rates of your loan after your application has been accepted.
Make sure you have locked down your rate and make sure you understand what you need to do in order to keep it. I recommend call the lending officer regularly through the process to ensure that your loan is moving along and the rates and terms have not changed. Frequently, you can lose your loan terms if you do not submit all your forms and documentation required by a specific date. Keep copies of all the information you have given the lender and send the information by fax or certified mail. Call to make sure it has been received. If at closing the terms of the loan aren’t what you agreed to, don’t sign the documents.
Many borrowers don’t know the terms of their loans. Many of these terms, especially in combination, could spell financial disaster. So watch out for prepayment penalties, balloon payments, and an adjustable rate. These three items together should be a huge red flag. If these are the terms your lender is offering then you should go and talk to other reputable lenders and make sure you are making the right decision.
One of the biggest scams is padding the closing costs. Most borrowers don’t know that the lender is required to give you a good faith estimate of your closing costs (GFE) within three working days of accepting the loan application. The list is itemized and contains costs that are non-negotiable such as property taxes. One scam is to low ball the GFE and then pump them up on the closing statement. It is important to get another copy of the GFE a few days before closing. If the fees are more than 5% higher then the original estimate then demand that the fees be lowered or you’ll walk.
Many of the closing costs are negotiable. Below is a mortgage broker’s website that shows a sample GFE and explains some of the fees. (Website to Sample GFE). Focus on the fees in section 800 and try to eliminate unnecessary fees and lower the lender fees. Section 1100 outlines the title company fees. This is the title company that your mortgage broker wants you to use. You can use a different title company but expect a fight from your broker. They have established relationships with title companies that frequently provide services that support their business. Frequently you can save money by employing the title company yourself but it may not be worth the hassle.
Make sure you get as complete a GFE as possible and let the lender know that you will walk away if the final closing statement is significantly different from the GFE. Incomplete GFEs are the most frequent cause of an under estimated closing costs.
Finally, look out for mortgage brokers that try to cross sell you additional services such as home owners insurance. Always get multiple bids on these services. You can almost always find better coverage at a more reasonable price if you bid out these services separately.
The Financial Pragmatist
Libby Mihalka
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