A Mortgage Primer: 3 Traps and 3 Tips

Photo (cc) by Images_of_Money

As mortgage rates continue to hit record lows, homeowners are scrambling to refinance to take advantage of the opportunity to lock in lower rates. And soon, even more will be on the hunt, thanks to President Obama. With an executive order unveiled earlier this week, he’s going to make it easier for underwater homeowners to refinance their mortgages.

The changes will open refinancing to lots of people with a mortgage backed by Fannie Mae or Freddie Mac — no matter what they owe — so long as they are current on their payments, have no late payments in the last six months, and have not made more than one late payment in the past year.

From this Oct 24th press release:

This program will continue to be available to borrowers with loans sold to (Fannie Mae and Freddie Mac) on or before May 31, 2009 with current loan-t0-value (LTV) ratios above 80 percent. The new program enhancements address several other key aspects of HARP including:

  • Eliminating certain risk-based fees for borrowers who refinance into shorter-term mortgages and lowering fees for other borrowers;
  • Removing the current 125 percent LTV ceiling for fixed-rate mortgages backed by Fannie Mae and Freddie Mac;
  • Waiving certain representations and warranties that lenders commit to in making loans owned or guaranteed by Fannie Mae and Freddie Mac;
  • Eliminating the need for a new property appraisal where there is a reliable AVM (automated valuation model) estimate provided by the Enterprises; and
  • Extending the end date for HARP until Dec. 31, 2013 for loans originally sold to the Enterprises on or before May 31, 2009.

Fannie May and Freddie Mac will be issuing details about the HARP changes to mortgage lenders and servicers by November 15. But whether you qualify for that program or not, if you’re considering a refi…

Mortgage traps to avoid

  1. Adjustable rate mortgages. These types of products probably contributed to the housing crisis. People were lured by the low initial rates and were unprepared for their dramatic rise later. While these are terrible products for long-term borrowers, they can make sense when you know that you’ll be moving before the the fixed rate expires. For example, our family just refinanced at an amazing rate of 2.75 percent. We selected a five-year fixed rate because we’re planning to move within five years. It’s a calculated risk, and if we stay longer, we know our rate will rise.
  2. Interest-only mortgages. The whole point of a mortgage is that you pay off the principal of your home over time. Even if your house’s value doesn’t appreciate, you’ll still build equity. With an interest-only product, you accumulate no equity and tread water indefinitely.
  3. Pre-payment penalties. The worst type of mortgage you can get is one that penalizes borrowers for paying off their mortgage early. It’s terrible when borrowers realize, too late, that their loans contain such a provision. Fortunately, pre-payment penalties are now illegal in some states and less common in all states. Still, it’s something you should ask about and avoid.

How to find the right mortgage

  1. Select the right company. Too often, home buyers are pressured by their real estate agent to use their preferred loan originator. Even if you have a great working relationship with your agent, realize that you’re paying the mortgage, not the agent. Shop around for the best rates and the lowest fees using tools like those we have here.
  2. Choose the best product. Enter a mortgage or a refinance with a clear goal in mind. Your mission can be to reduce your monthly payments, increase your equity growth, or take out cash. Your individual goals (and the length of time you plan on owning your home) will dictate the type of mortgage you need.
  3. Read everything. It’s easy to dismiss the reams of fine print that accompany every mortgage or refinance. Remember that nearly every tale of mortgage disaster includes a salesperson’s verbal assurances that contradict the documents. The best practice is to ask for a copy of the closing documents in advance so that you can take as much time as you need to understand all of it, rather than try to undo what you have already signed. If you don’t have the time or have trouble understanding anything, hire a lawyer. It’s worth the money.

By carefully considering all your options, and taking the time to read through each document, you can ensure that your mortgage benefits you and your family – not just banks and real estate agents.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
11 Home Upgrades With the Best Payback in 2020
11 Home Upgrades With the Best Payback in 2020

The home remodeling projects that deliver the best bang for the buck tend to have one thing in common.

Eat This Food If You Want to Avoid Alzheimer’s Disease
Eat This Food If You Want to Avoid Alzheimer’s Disease

One type of food associated with the Mediterranean diet offers especially large benefits.

8 Key Steps to Planning for Retirement as a Couple
8 Key Steps to Planning for Retirement as a Couple

Ready for retirement? Not so fast. You might be surprised at some of the issues that come up for couples when they plan.

The 5 Worst Home Upgrades for the Money
The 5 Worst Home Upgrades for the Money

These home improvement projects basically never pay off.

13 Affordable Products for a Better Night’s Rest
13 Affordable Products for a Better Night’s Rest

These Amazon products can help you finally catch 40 winks — or more.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

8 Tips for Retiring Comfortably on Social Security Alone
8 Tips for Retiring Comfortably on Social Security Alone

It’s never too early to start learning how to live well while living on less.

Am I Eligible for My Mother’s Social Security Benefit?
Am I Eligible for My Mother’s Social Security Benefit?

Can an adult daughter tap into her late mother’s benefit?

The Next 5 Groups Who Will Get the COVID-19 Vaccine
The Next 5 Groups Who Will Get the COVID-19 Vaccine

The CDC has unveiled a schedule that likely will determine who gets the next doses.

11 Generic Products You Should Buy at Costco
11 Generic Products You Should Buy at Costco

Not all generics are worthwhile, but these are among the best from Costco’s Kirkland Signature brand.

9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

This Surprise Factor Can Raise Your Risk of Dementia
This Surprise Factor Can Raise Your Risk of Dementia

Nearly half of U.S. residents may face this threat.

Organize Your Home With These 10 Thrift Store Finds
Organize Your Home With These 10 Thrift Store Finds

Resolve to be clutter-free in 2021 with these secondhand purchases.

This Gas Station Scam Is Victimizing More Drivers
This Gas Station Scam Is Victimizing More Drivers

For the second straight year, a growing number of Americans believe they’ve fallen prey to this scam.

11 Laws You Could Be Breaking Without Knowing It
11 Laws You Could Be Breaking Without Knowing It

Seriously? Fibbing about the weather is a crime? This and other little-known legal traps await the unwary.

These Are the 3 Best Used Cars You Can Buy
These Are the 3 Best Used Cars You Can Buy

These vehicles boast reliability, safety and long-lasting value.

6 Legal Documents Retirees Need — but Don’t Have
6 Legal Documents Retirees Need — but Don’t Have

Few retirees have all of these documents that are crucial to their golden years — especially during a pandemic.

13 Things Seniors Can Get for Free — or Almost Free
13 Things Seniors Can Get for Free — or Almost Free

There are many ways to get cheap or free services and goods after reaching a certain age.

Internet Providers Can’t Charge You for This Anymore
Internet Providers Can’t Charge You for This Anymore

Starting this month, your ISP no longer can bill you for this fee.

Can a Divorced Widow Claim Her First Husband’s Social Security Benefits?
Can a Divorced Widow Claim Her First Husband’s Social Security Benefits?

The rules are complicated when it comes to eligibility for survivors benefits.

9 Small Expenses That Are Bleeding Your Budget Dry
9 Small Expenses That Are Bleeding Your Budget Dry

Keep more of future paychecks by eliminating these budget-busting unnecessary expenses.

15 Painless Ways You Can Cut Costs in 2021
15 Painless Ways You Can Cut Costs in 2021

Follow these tips to save, so you’ll have money for things that really matter.

11 Huge Retirement Costs That Are Often Overlooked
11 Huge Retirement Costs That Are Often Overlooked

Does your retirement budget account for all of these costs?

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.