The interest rate the lender commits to providing you at the beginning of the mortgage process should be the interest rate you receive at the end of the mortgage process. One of the most common ways that borrowers get taken advantage of on their mortgage is to get promised one interest rate when they apply for a mortgage and then they end up receiving a higher rate when the mortgage closes -- this is sometimes referred to as a “bait and switch.” Paying a higher interest rate can cost the borrower tens of thousands of dollars over the life of the mortgage. Typically borrowers find out about the higher interest rate within a week of the expected closing date of their mortgage, when they need the proceeds from the loan to complete their home purchase. Borrowers usually accept the higher interest rate instead of starting the mortgage process all over and potentially losing the house they want to purchase.
In some cases an increase in interest rate is caused by natural fluctuation in the marketplace -- interest rates can be unpredictable and sometimes they go up quickly. In other cases, the lender is acting in bad faith and drags out or delays the mortgage process to get the borrower to pay a higher interest rate to make more money.
In either case, what can the borrower do to avoid an increase in interest rate over the course of the mortgage process? Borrowers usually have the option to lock their interest rate at the beginning of the mortgage process to make sure that it does not increase from the time they apply for their mortgage until when their loan closes.
If the time it takes the lender to process your mortgage exceeds the lock period it may be possible to ask for a rate lock extension. In a rising interest rate environment a lender may be unwilling to provide an extension or may try to charge you a rate lock extension fee. You should always do diligence at the beginning of the mortgage process to understand how long it takes the lender to process, approve and fund your loan, especially if interest rates are trending higher.
You should also be aware that some lenders advertise attractive mortgage terms with unrealistically short rate lock periods, which is another type of bait and switch. For example, a lender may offer a low mortgage rate but the lock period is only 15 days. It is highly unlikely that your mortgage closes in 15 days, which leaves you vulnerable to changes in your loan terms. When the lock period expires, your mortgage rate may increase or the lender may attempt to charge you a rate lock extension fee, as discussed above. This is why it is important to understand the length of the lock period that applies to the lender's offer, especially if it seems too good to be true.
We should also emphasize that if you decide to lock your mortgage, make sure that the lock period is long enough to process and close your mortgage, which can take 45 to 60 days or even longer. In some cases, locking your mortgage can cost you extra. The longer the lock period, the greater the cost in terms of a higher interest rate or potentially higher fees. However, avoiding an increase in your mortgage rate can potentially save you thousands of dollars over your loan. In a flat or declining interest rate environment, or if you have full trust and confidence in your lender, it may not make sense to lock your mortgage but it is important that the you know the potential benefits.
We recommend that you compare multiple lenders in the table below to find the one that best meets your needs. The more lenders you contact, the more likely you are to find one that you can trust. Shopping lenders is also the best way to save money on your mortgage.
Lenders frequently promote “no cost” mortgages as a way to attract potential borrowers. The idea of not paying closing costs can be enticing to borrowers who are looking to save money on a mortgage but in some cases a “no cost” mortgage may end up costing the borrower more in the long run. If you are interested in a no cost mortgage be sure to ask the lender up-front what costs you are required to pay, if any. Make sure that you are not required to pay any lender or third party closing costs including non-lender costs such as the appraisal, title and escrow fees.
In some cases with a "no cost" mortgage the lender requests that the borrower pay for non-lender closing costs such as appraisal, title, escrow and attorney (if applicable) fees. This is not truly a "no cost" mortgage. In other cases "no cost" mortgages may require the borrower to pay certain costs, such as an appraisal fee, up-front, and then those costs are rebated to the borrower when the mortgage closes. This is considered a "no cost" mortgage because the borrower recovers the up-front costs when the mortgage closes.
Review How a No Cost Mortgage Works
Additionally, make sure that no costs are rolled into the mortgage, which increases your mortgage amount and monthly payment. Rolling closing costs into the loan amount is a clever way for lenders to make borrowers pay closing costs without charging borrowers up-front. Your loan amount when your mortgage closes should equal the loan amount you agreed to obtain at the beginning of the process.
It is important to highlight that because a "no cost" mortgage typically has a higher interest rate than a mortgage with standard closing costs, the borrower could pay thousands more in interest expense over the life of the loan.
For example, the interest rate on a “no cost” mortgage may be 4.125% while the interest rate on a standard fee mortgage may be 4.000%. On a $300,000 30 year fixed rate mortgage, paying an extra .125% in interest rate (so 4.125% instead of 4.000%) will cost you almost $8,000 more in interest expense over the life of your mortgage. So in many cases, it does not make sense to select a “no cost” mortgage if you are required to pay a higher interest rate. Be sure to understand the trade-off between not paying closing costs up-front and paying a higher interest rate which increases your monthly mortgage payment and total interest expense.
Use ourMORTGAGE COMPARISON CALCULATORto understand the true cost of a “no cost” mortgage
According to mortgage industry regulations, lenders are only permitted to charge you a small credit report fee ($10 - $30) before you submit your mortgage application. After you submit your application, the lender is allowed to charge you additional fees to process your loan.
In some cases, lenders accept your application and then charge you fees even if you cannot qualify for the mortgage. This is a way lenders rip off unsuspecting borrowers. Not only is your mortgage application declined but you may also lose hundreds of dollars in unnecessary fees.
To avoid this unfortunate outcome, always ask to be pre-approved before you submit your application and pay any significant costs such as lender or appraisal fees. In most cases, the lender should know if you meet their qualification requirements before you submit your application. This approach can save you money, time and unnecessary hassle.
Another item that mortgage borrowers should focus on is closing costs. In many cases borrowers will concentrate on finding the lowest interest rate for their mortgages but pay less attention to closing costs and end up paying more than they should. Closing costs can be complicated. Closing costs vary by lender, geography and mortgage program and size. Additionally, there are different types of closing costs. Non-recurring closing costs are one-time, up-front costs that borrowers pay to various third parties to process and close the mortgage such as lender, appraisal, title company, escrow and attorney (if applicable) fees. Recurring closing costs are costs that the borrower will continue to pay after the mortgage closes. Typically the borrower is required to pay a portion of these ongoing costs which are calculated based on at what time of year and day of month the mortgage closes. Examples include interest expense (from the day your mortgage closes until the end of the month in which your mortgage closes), homeowners insurance and prorated property taxes, among other applicable costs.
So what is the best way to make sure you do not pay excessive closing costs? First, borrowers should gather mortgage proposals from multiple lenders and compare closing costs. When you contact lenders you should request that they provide a Loan Estimate and Lender Fees Worksheet, which are standard documents that outline the key terms of the mortgage including interest rate and closing costs. Lenders are required by law to provide you an Loan Estimate within three days of submitting a loan application and although lenders are not required by law to provide you with a Lender Fees Worksheet, they will likely provide it to you if you ask. The Loan Estimate and Lender Fees Worksheet are standard documents which allows you to more easily compare mortgage proposals from multiple lenders.
One tip you can use to quickly compare and identify excessive closing costs is to compare the Annual Percentage Rate (APR) presented in the Loan Estimate (top of page three) to the interest rate. In short, the APR represents what your mortgage interest rate would be if it included all up-front lender and closing costs. If the APR is close to your interest rate then you know that the closing costs are relatively small. If the APR is much higher than your interest rate then you know that the closing costs are relatively high and you may want to negotiate lower costs or change lenders. Additionally if you have proposals from two lenders that are offering the same interest rate but one APR is higher than the other, then you know the lender with the higher APR is charging higher fees.
By comparing multiple mortgage proposals you can understand the range of closing costs and potentially negotiate lower closing costs with the lender you select.
Use ourMortgage Closing Cost Calculatorto review estimated costs for your loan so you can avoid paying too much
If you make a down payment of less than 20% when you buy a home, lenders typically require the borrower to purchase private mortgage insurance (PMI) which is an which is an additional monthly fee paid by the borrower for insurance to protect the lender in case the borrower defaults on the mortgage. In some cases, the lender may charge a higher interest rate instead of charging the borrower a separate PMI fee. There can be a significant difference in cost between paying a higher interest rate over the life of the mortgage and paying for PMI separately.
With PMI, the borrower only pays the PMI fee as long as the loan-to-value (LTV) ratio is greater than 80% (so the amount of the mortgage divided by the value of the property is greater than 80%). The loan-to-value ratio typically decreases as borrower pays down the mortgage balance over time or if the property value increases and the borrower can request to have the PMI fee removed if he or she believes the loan-to-value ratio is less than 80%.
Requesting the removal of PMI can be a time-consuming process but removing PMI can save the borrower a significant amount of money. If the borrower pays a higher interest rate instead of paying for PMI separately, the borrower pays the higher interest rate over the life of the mortgage (unless they are able to refinance), which can cost the borrower thousands of dollars more in interest expense.
If you decide to make a down payment of less than 20% and the lender does not require that you pay PMI separately, be sure to ask the lender if PMI is included in the interest rate, and if the answer is yes, ask what the interest rate would be if you paid PMI separately. If you pay for PMI separately, the interest rate should be lower and you will be able to have the PMI fee removed if your loan-to-value ratio drops below 80% in the future, which could save you a significant amount of money in interest expense over the life of your mortgage.
Some mortgages require the borrower to pay a penalty if you repay the loan in full prior to a specified period of time. For example, the if a borrower has a 30 year fixed rate mortgage he or she may be charged a pre-payment penalty if the the mortgage is paid in full in the first five or ten years of the mortgage. To determine if your mortgage has a pre-payment penalty you should ask your lender and also review the Loan Estimate, which outlines key mortgage information and indicates if your mortgage has a pre-payment penalty (see the Loan Terms table on the top of page one of the Loan Estimate. We recommend that borrowers select mortgages that do not have a pre-payment penalty as this is a potentially unnecessary cost to the borrower in the future.
When you are shopping for a mortgage you may find a lender that offers a low rate that seems very enticing. Before you select that lender, be sure to read the fine print for the loan quote. In some cases lenders advertise a low mortgage rate that assumes you pay discount points.
There are multiple problems with this. First, discount points are expensive -- 1% of your loan amount. For example, on a $250,000 loan, if you are charged two discount points, you pay $5,000 in additional closing costs ($250,000 * 2% = $5,000).
The second issue with this tactic is that paying discount points is completely optional. It is your choice and a lender cannot require you to pay points. In certain situations it makes sense to pay points but the decision is yours and not the lender's.
When you compare mortgage terms be aware of the discount points included in the lender's quote. If you find two lenders that offer the same mortgage rate select the one that assumes you pay the fewest points.
Use ourDISCOUNT POINT CALCULATORto compare mortgages with different points and rates
“Tips for avoiding mortgage modification scams.” CFPB. Consumer Financial Protection Bureau, December 1 2011. Web.
“CFPB Takes Action Against Mortgage Payment Company And Servicer For Deceptive Ads” CFPB. Consumer Financial Protection Bureau, July 28 2015. Web.