If you’re in the process of mortgage refinancing there are a number of common mortgage mistakes you should know about that can take away nearly all the benefit you’ll get from your new home loan. Lender junk fees, deceptive marketing practices, and overpaying the loan originator will all take cash out of your pocket that you should not be paying. Here are several of my best tips before you refi to help you avoid the common mortgage mistakes costing your neighbors thousands of dollars.
Common Mortgage Mistakes & APR
Annual Percentage Rate (APR) was intended to make mortgage shopping easy by giving you the total cost of a home loan including all fees expressed as a yearly percentage rate. As with most consumer protections lawmakers screwed it up by failing to set standards for how lenders calculate APR. Because of this lack of standard and the fact that APR is based on the Good Faith Estimate you’ll never get an apples-to-apples comparison across lenders using APR. You should never rely on Annual Percentage Rate alone when shopping for the best mortgage refinance rates.
Beware the Exploding ARM
There is still a lot of deceptive advertising when it comes to mortgage loans. Teaser rates have found their way back into the marketplace despite historically low-interest rates. What’s a teaser rate? Simply put it’s a mortgage rate that’s too low to be true. If you’re seeing lenders advertise 30-year fixed rates at 3%, that’s a teaser. Here’s why:
Hybrid arms commonly seen as a 5/1 Adjustable Rate Mortgage are often marketed as “low, fixed-rate” because for the first five years of the term they are fixed at that ultra-low teaser rate. After five years the mortgage converts to an Adjustable Rate Mortgage (ARM) for the remaining 25 years, adjusting every year. That’s what a 5/1 hybrid means. The loan is fixed for the first 5 years and then resets the mortgage rate every one year (5/1). The fact that the loan converts after five years is downplayed in much of the marketing you’ll see from lenders; hence the name “exploding ARM,” coined by people who have burned by these home loans. Think you’ll just refinance again after five years to avoid the bang? Hybrid ARMS often carry hefty prepayment penalties to prevent serial refinancing.
Overpaying Loan Origination Fees
Another common mortgage mistake is overpaying the person arranging your new home loan. Mortgage brokers and other companies that arrange home loans from wholesale lenders are compensated for the work they do by charging a loan origination fee. While there’s no standard amount for the loan origination fee, one percent is a perfectly reasonable amount to pay your broker. All of the closing costs you find on your Good Faith Estimate are negotiable so don’t be afraid to haggle with mortgage lenders and brokers and question all the fees you find in your loan documents. Common junk fees you want to keep your eyes peeled for include the mortgage rate lock fee, application fee, processing fee, and broker courier fees.
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