Mortgages: Consumer Tips
Buying a home is one of the most complex financial decisions you will ever make. In addition to the financial and legal issues involved, real estate agents and lenders may not be acting in your best interest:
- Consider hiring a buyer's agent who works for you.
- Get prices of other homes in the neighborhood. Knowing these prices can help you avoid overpaying.
- Have the property inspected. Use a licensed home inspector to look over the property before you buy it.
- Check to see if a particular home requires you to pay any ongoing homeowners association (HOA) or condo fees.
Mortgages
When shopping for a home mortgage, make sure you obtain all of the relevant information:
- Research current interest rates. Check the real estate section of your local newspaper, use the Internet, or call several lenders for information.
- Check the rates for 15-year, 20-year and 30-year mortgages. You may be able to save thousands of dollars in interest charges by getting the shortest-term mortgage you can afford.
- Ask for details on the same loan amount, loan term and type of loan from multiple lenders so you can compare the information. Be sure to get the APR, which takes into account not only the interest rate, but also points, broker fees and other credit charges expressed as a yearly rate.
- Ask whether the rate is fixed or adjustable. The interest rate on adjustable-rate mortgages (ARMs) can vary a great deal over the lifetime of the mortgage. An increase of several percentage points might raise payments by hundreds of dollars per month.
- If a loan has an adjustable-rate, ask when and how the rate and loan payment can change.
- Find out how much of a down payment is required. Some lenders require 20 percent of the home's purchase price as a down payment. But many lenders now offer loans that require less. In these cases, you may be required to purchase private mortgage insurance (PMI) to protect the lender if you fall behind on payments.
- If PMI is required, ask what the total cost of the insurance will be. How much will the monthly mortgage payment be when the PMI premium is added, and how long will you be required to carry PMI?
- Ask whether you can pay off the loan early, and whether there is a penalty for doing so.
When you shop for a mortgage, a lender will give you a loan estimate form. This form should highlight the main features of that loan, such as the amount, if the rate is fixed or adjustable, and the term. If you shop for rates from multiple lenders, these forms will help you compare loan options.
Fixed-rate and adjustable-rate mortgages are the two main types of mortgages, but there is a wide variety of other mortgage products available. Below are pros and cons of some of the mortgage products you want to consider:
| Type of Mortgage | Pros | Cons |
|---|---|---|
| Adjustable-rate (ARM) or variable-rate mortgage | Usually offers a lower initial rate of interest than fixed-rate loans. | After an initial period, rates fluctuate over the life of the loan. When interest rates rise, generally so do your loan payments. |
| Balloon mortgage | Usually a fixed-rate loan with relatively low payments for a fixed period. | After an initial period, the entire balance of the loan is due immediately. This type of loan may be risky for some borrowers. |
| Federal Housing Administration (FHA) loan | Allows buyers who may not qualify for a home loan to obtain one with a low down payment. | The size of your loan may be limited. |
| Fixed-rate mortgage | No surprises. Interest rate stays the same over the entire term, usually 15, 20, or 30 years. | If interest rates fall, you could be stuck paying a higher rate. |
| Interest-only | Borrower pays only the interest on the loan in monthly payments for a fixed term. | After an initial period, the balance of the loan is due. This could mean higher payments, paying a lump sum or refinancing. |
| Reverse mortgage | Allows seniors to convert equity in their homes to cash. You don't have to pay back the loan and interest as long as you live in the house. | The entire loan amount is due immediately once the borrower no longer resides in the home. This can cause problems for the borrower's estate. |
| Veterans Administration (VA) loan | Guaranteed loans for eligible veterans, active duty personnel and surviving spouses. Offers competitive rates, low or no down payments. | The size of your loan may be limited. |
Once you have chosen a lender and a home to buy, and gone to contract, you will have to go into a closing meeting. Three business days before the closing, your lender is required to give you a Closing Disclosure. Compare this document to the loan estimate you received from the lender in the beginning of the home-buying journey. Be sure there are no discrepancies to avoid costly surprises at closing. Visit http://www.consumerfinance.gov/owning-a-home/ to find samples of both documents, a home loan tool kit and other guides for the home-buying process.
Home Foreclosure
Foreclosure is the legal means that your lender can take to repossess your home. If you owe more than your property is worth, a deficiency judgment is pursued. This action would require you to pay the difference between the amount you owe and your home's value. Both foreclosures and deficiency judgments appear on your credit report.
Take these steps to avoid foreclosure:
- Do not ignore letters from your lender. If you are having problems making payments, call or write to your lender's Loss Mitigation Department immediately. Be prepared to provide financial information, such as your monthly income and expenses. Without this information, the lender may not be able to help you.
- Stay in your home. You may not qualify for assistance if you abandon your property.
- Contact a HUD-approved housing counselor. Call 1-800-569-4287 or TDD 1-800-877-8339 for the housing counseling agency nearest you.
- Contact Making Home Affordable for help. Visit https://www.makinghomeaffordable.gov/ or call 1-888-995-HOPE (4673), or 1-877-304-9709 for hearing-impaired homeowners, to talk to a HUD-approved credit counselor who will guide you through your options for free.
- Beware of offers and sales pitches that target homeowners who are struggling to make mortgage payments.
Mortgage Rules to Protect You
The Consumer Financial Protection Bureau (CFPB) created rules to ensure that you can afford your mortgage. Some protections include the following.
Ability to Repay
- Lenders must verify your ability to pay back a mortgage. They may review your credit history, proof of your income, and your other debt and living expenses.
- Your ability to repay must be based on the highest interest rate you would be charged, not teaser rates.
Increased Information
- You must receive appraisal reports at least three days before closing on the house.
- Your servicer must send you statements.
- You must receive notice of interest rate increases two months in advance.
High-Cost Loans (High Fees, Points, APR)
- A lender must inform you that you have a high-cost loan and state all the fees and costs up front.
- You must receive counseling from a housing counselor.
- Your lender can't charge prepayment penalties or balloon payments.
Contact the Consumer Financial Protection Bureau (http://www.consumerfinance.gov/) for more information on mortgage rules.
Mortgage Refinancing
Refinancing your mortgage can help you save money or make your monthly payments more affordable. Some factors that make it a good idea include:
- A decrease in interest rates.
- A change in the length of your mortgage.
- A change from a fixed-rate to adjustable-rate mortgage.
Follow these tips before you decide whether or not to refinance:
- Research interest rates offered by several lenders to compare your options.
- Research options available through the Federal Housing Administration (FHA), Home Affordable Refinance Program (HARP), or your local housing agency.
- Read your current mortgage to see if there are any fees or penalties for early cancellation.
- Gather information about refinancing expenses, such as appraiser, broker and attorney fees, or changes in taxes.
For an overview, review the Federal Reserve's publication on refinancing here: https://www.federalreserve.gov/pubs/refinancings/default.htm. You may also wish to consult a HUD-certified housing counselor.
U.S. General Services Administration (GSA). (2016, January). Housing. In Consumer action handbook (pp. 25–28). Retrieved December 6, 2016, from https://www.usa.gov/