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Borrower Beware
Mortgage Lender Tactics
(and How to Avoid Them)
In the market for a new home? Before you start shopping around for the best mortgage, there are several important things you should be aware of as a prospective borrower. Read on to learn about some of the common tactics you might face when dealing with a lender or broker.
TRICK 1
Increasing Your Rate for Not Escrowing
Lenders don’t always tell you about the little ways they charge you more—like charging you a fee or increasing your rate if you prefer to pay your own real estate taxes.
TRICK 2
Fractional Points
When is the rate you see not the rate you actually get? When your lender hides a ¼ point in your mortgage. A ¼ point will cost you about $500 more on a typical mortgage.¹
TRICK 3
Best Rates and Perfect Customers
Most lenders advertise their “best rate”. By this they mean that if you are the “perfect” customer with the highest FICO score, lowest LTV (highest down payment), or even have the highest income, then you get the advertised rate. If you are not “perfect”, you get a higher rate.
TRICK 4
Yield Spread Premium / Commissions
Believe it or not, most mortgage originators get paid more if they can sell you on a higher rate. It’s called a “yield-spread premium”, which means if they can increase your yield (i.e. rate), they get a premium on their paycheck.
TRICK 5
Marketing Agreements
If your mortgage lender is paying your realtor, are you really getting the best mortgage? Some lenders pay realtors and builders to “market” their mortgage products to potential customers. These types of arrangements are sometimes referred to as “in-house lenders” because they pay for space inside the realtor’s or builder’s office.
TRICK 6
Misrepresenting Closing Costs
The phrase “closing costs” is an ambiguous term. Some lenders are more inclusive than others when describing closing costs. Other lenders may attempt to understate closing costs by only detailing subsets of total closing costs. A common trick is to only quote lender fees, which is usually a fraction of total closing costs. Other lenders will quote lender fees and some third party charges, like the cost of appraisal and credit review, but might not include title company charges. Beware of lenders who claim they can’t quote total closing costs because they don’t know the exact loan amount. They should still be able to give you a good approximation based on your estimated loan amount.
TRICK 7
"Preapproval"
A real preapproval includes review of your credit history, verification of your income, and a real determination of how much house you can afford. Unfortunately, many lenders only run your stated income (no income documents are reviewed) through a home affordability calculator. This is usually referred to as a “prequalification” and is much less reliable than a real preapproval. Some lenders will actually refer to this as a preapproval.
TRICK 8
Service Release Loans
Some lenders offer two different rates for the same mortgage loan depending on whether they plan to service your loan or sell your loan. They will actually offer you a lower rate if you are willing to have your loan transferred to another company after it closes. Even worse, sometimes they will quote you their service released rate (the lower rate associated with the loan being sold to another lender), without telling you that at this rate they will have to sell your loan. There can be problems with escrow accounts and taxes, refinances and payoffs, and getting liens released, when your loan is sold to another lender.
TRICK 9
"Jumbo Loan Pricing"
Most industries operate under the principal of economies of scale; the more you buy, the lower the rate. Mortgages might be the only industry where the more you buy, the higher your rate. The majority of lenders increase your rate for loan amounts over $766,550 (also known as “jumbo loans”).
TRICK 10
Biweekly Mortgage
It requires you to pay your mortgage every other week, thus resulting in 26 payments a year. These 26 payments add up to roughly 13 regular mortgage payments. Thus, with a biweekly mortgage, you’ll be making roughly one extra full mortgage payment a year. As a result, you will pay off your mortgage six years faster. Banks usually charge about $400 for this feature. There is actually nothing wrong with paying off your mortgage faster, but you do not need to spend $400 to do it. You can do this on your own, any time, by simply making an extra payment.
TRICK 11
Teaser Rates on Home Equity Lines of Credit
Some lenders advertise a teaser or introductory rate (usually 3 to 6 months) on home equity lines of credit. When the teaser period is over, your rate increases to the permanent rate, which can be several full percentage points higher.
TRICK 12
Prepayment Penalties
Mortgage and home equity loans sometimes have prepayment penalties. This is a fee that is charged when a loan is paid off too soon, usually within the first 3 years, and can be sometimes thousands of dollars. It’s most common in home equity lines and loans, and goes by several different names, including “early closure fee”, “early termination fee”, or “reimbursem*nt closing costs fee”.
TRICK 13
Lien Position on Home Equity
Some lenders will advertise a very attractive home equity rate, and then hide in the fine print the fact that it applies only to first lien position loans. Most home equity lines are in second lien position, so the advertised rate does not work for most consumers. It’s a deliberate trick to make you think their rate is lower than it is.
TRICK 14
Only $15 a Month Trick
This is otherwise known as 1/8% higher mortgage rate, and less commonly as $5,400.² Say you tell your lender you’ve found a slightly lower rate – even just .25% or .125% lower – than the rate he’s offering. He will try to convince you that it’s just .125% lower and it will only lower your payment by about $15 a month, so it’s not worth switching lenders. What he won’t tell you is that .125%, or $15 a month, can add up to save you $5,400 over the life of the typical loan – or even more if your loan is larger.
TRICK 15
Mortgage Broker
While mortgage brokers aren’t really a trick, you should be aware that they are not regulated the same way as federally chartered banks. Federally chartered banks are regulated by several federal agencies, including the Comptroller of the Currency (OCC), Consumer Financial Protection Bureau (CFPB), and the Federal Reserve. Mortgage brokers are usually regulated at the state level, where scrutiny is less stringent. Sometimes mortgage brokers will refer to themselves as “mortgage bankers” or even include “Bank” in their company’s name. Don’t be fooled—just because somebody refers to themselves as a “bank” or “banker”, it does not mean they are regulated the same as a federally chartered bank.
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