5 Worst Pieces Of Mortgage Advice On The Internet – Guest Post
Any internet user knows that the web is full of bad financial advice, but that doesn’t mean that we all know how to identify it at first glance. It’s easy to remember that anyone who claims that they can predict with certainty the future behavior of the stock market is snake-oil salesman, but some of the most useful and important financial planning tips are less intuitive.
For example, knowing that you should look for a fee-only broker or financial advisor may not be something you’ve heard before. This will help to ensure that the person you’re paying to help you navigate your financial decisions has your best interests in mind, rather than their own commission.
The inspiration for this article came to me after I found a post online called “5 Reasons not to Mortgage Your Home to Pay off Your Credit Card Debt.” This actually made me laugh out loud, and not just because of how hilariously long the title is. I couldn’t understand how anyone could need more than one reason to tell them that was a bad idea: If you default on your credit cards, you’ll be sued. If you default on your mortgage, you’ll be homeless.
I spent one afternoon deliberately reading bad financial advice, and after all of the awful tips that I jotted down for consideration, I realized that I had the beginnings of a book, not a blog post. In order to narrow down the field a little, I decided that for now I would look specifically at mortgage related misguidance.
• Stop paying your mortgage to get a loan modification
Getting a loan modification may be a good idea for you, and there are some government backed programs that are only available to borrowers who are already in default, but that does not make this strategy worth the risk.
Even if you are lucky enough to be able to modify your loan, you’ll still be responsible for all of the late fees that your lender assesses, and your credit will be shredded by such a significant delinquency. If you’re among the majority of borrowers who are stuck with the original terms of their loan, you’ll be in very real danger of losing your home.
• Add the closing costs to your home loan
The cluster of vaguely defined, randomly set fees that lenders will charge every mortgage borrower are referred to as the closing costs. These can include the loan origination fee, which tends to be about .5-1.5% of the loan, a rate lock fee, application fee, and any other processing fees the lender can think of.
Closing costs usually wind up being about 2-4% of the total loan, which may sound small, but if you’re borrowing $100,000 for a home, you’ve just added up to $4000 and the interest it generates to your loan. It is a far better idea to wait until you’re able to save up the closing costs, as well as your down payment before entering into a mortgage agreement.
• A home is the best investment
Home ownership is one of the hallmarks of middle class American life, and I am not trying to dissuade anyone from taking that leap. However, purchasing a home strictly as an investment is a little bit like buying a cow so you don’t have to go out for milk anymore. The amount of labor and expense required may exceed the financial gains.
Owning a home comes with the added costs of property taxes, maintenance, and homeowners’ insurance. In many places, after a housing bubble pops the market never fully recovers the value lost, and even if it does, or if you’re lucky enough to live in a place where home prices never drop, they almost never keep up with inflation.
• Follow the 2% rule before you refinance
This piece of financial lore suggest that you shouldn’t bother to refinance your loan unless it will drop your interest rate by at least 2%. The primary argument for this seems to be that there will be new costs associated with a refinance, and it may not be worth the hassle.
A little simple math can clear this misconception up. If we go back to our $100,000 example, even just a 1% reduction in interest will save $1000 per year. Perhaps you live a life where that is an irrelevant sum, but for most of us that would make a significant difference.
• Refinance with your bank
There are several reasons to refinance your home, and you may be inclined to do so through a bank or credit union that you already know and trust rather than going through a broker who may or may not be looking to rip you off. Unfortunately, this instinct may lead you away from the best deal for you.
The Real Estate Settlement Procedures Act is a law that was passed with the intention of protecting borrowers from invisible markups on home loans. This legislation requires that mortgage brokers disclose the amount that they add to the market price of a loan. The law was specifically written to exclude banks, so they’re able to mark up the loans they sell at whatever rate they’d like, and never reveal to the borrower what the fair price would have been or what commission they were charged.
One of the most difficult things about this Mac-truck sized loophole is that it allows mortgage brokers to turn themselves into ‘broker banks,’ simply by funding all of their loans themselves. If that is the case, they no longer have to disclose their commissions or inform customers of the fair market price for their product.
Before committing to a mortgage, shop around, investigate the rate you would be charged by your own bank as well as one or two other lenders. Ask any brokers you’re considering working with if they close their loans in the name of a wholesale lender, or if they’re a ‘broker bank.’ At least this way you’ll know who is giving you all of the information and who is trying to sneak some extra charges past you unnoticed, and you may have the opportunity to attempt to negotiate down the commission.
Frank Newhouse is a freelance writer with experience in property management and personal finance. He currently writes for AC Florida, which helps people in the Miami area find air conditioning services.