There are many unethical mortgage brokers and loan officers in the industry. They often use misleading marketing and ethically questionable tactics to get your business. Here are just a few things as a consumer you should watch out for.
"30 year mortgage? this is a phrase used in many marketing campaigns to mislead consumers to believe that the product is a 30-year FIXED mortgage. While there are mortgages with 10, 15, 20, and 40 year terms most mortgages are 30-year terms. While this advertising phrase is not a lie, your mortgage is for 30 years, most consumers infer that it is also a fixed rate when often it is some form of an adjustable rate mortgage or ARM.
Sometimes loan officers will quote you an interest rate for a 2 year ARM (adjustable rate mortgage), and it may sound like a good deal. What they may not be telling you is that the loan may have a prepayment penalty, where you will be charged a large fee if you refinance or sell your home before the prepayment period is over. Sometimes they may even put on a prepayment penalty that exceeds your fixed rate period. If you have a loan that is fixed for 2 years, and a prepayment penalty that lasts for three years, then you will almost definitely lose a large amount of money. At the end of the two years, your interest rate will probably increase drastically, and so will your payments. If you choose to refinance, you will pay a penalty which may be several thousand dollars. Be sure you know what type of loan you are getting into, and watch out for this type of deceptive marketing. ALWAYS ask if your loan will have a prepayment penalty, and for how long.
Some dishonest loan officer may "low ball" the settlement costs, that is, they purposely understate the settlement costs to earn borrowers' businesses. Home buyers should be extra careful with loan officers whose Good Faith Estimates list lower costs and less items compare to others.
Many lenders market "No Points, No Fee" mortgage loans in a somewhat misleading manner. I have spoken with many clients who see or hear this marketing and think that the lender is actually giving away the fees for free. The fact is that there are fees associated with all mortgage loans. A lender can structure a loan to where the lender will pay the associated fees but in order to do this they must charge a higher rate of interest on the loan. Doing this technically allows the lender to advertise no points and fees but those items are certainly not being waived or given away.
You should watch out for misleading marketing about the pay option ARMS. There are many inexperienced mortgage professionals out there that either do not understand how these programs actually work or blatantly deceive the consumer about how they work. They are called a Pay Option ARM because they are an adjustable rate mortgage that gives you choices each month of how much you want to pay. One of those options is a negative amortizing payment option. This means that your loan balance will increase instead of go down. Be aware of this. You will also have an interest only option where you will only pay the interest on your loan and your loan balance will not go up nor down, but remain the same. Your payments and rates will change during the first five years. You are not on a fixed rate on these loans. These types of loans are good for some people, but NOT for everyone. If you decide this is a good mortgage option for you, then truly read the paperwork at your closing and pay attention to the details of the loan.
Some less-than-scrupulous loan officers will advertise a low interest rate. Often what they are not telling you is that you have to 'buy' the rate down. You may end up paying thousands more in closing costs to have the lower rate. Then, if you refinance or sell your home within a few years, you would not have had the low interest rate loan for long enough to recoup the amount you paid to have the loan in the first place. This is a perfect example of misleading marketing that you should watch out for. Be aware that almost all loan officers have the ability to lower your interest rate by charging you more in fees. You should discuss this with your loan officer to see if it would benefit you.
Another common scheme is the "0% interest" mortgage. It has ridiculous requirements that no one can meet and is just a way to get you to call.
Another common ploy used by some loan officers is to give you, the consumer, inaccurate information about your credit scores and what affects them. Some loan officers will tell you your credit score is lower than it actually is. This will either prevent you from shopping around, or it will make their quote seem much better than any other quotes you may get when you tell the other loan officers the score.
Loan officers will also tell you not to shop around because if some one else pulls your credit it will drop your scores and he/she will not be able to get your loan approved. There are many resources you can check to verify that having some one else pull your credit will not drastically lower your credit scores.
If you ever have your credit pulled by a loan officer always ask for a credit score disclosure or a copy of the full credit report to be sent to you.
The Flat Fee loan is also a current marketing deception. It does not take into account third party fees such as appraisal and title company fees. Your closing costs add up to be much more then what is advertised
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