| Mortgage
Myths - Part 1
Most
peoples’ belief structures about mortgages are based
on truisms that may have been valid for your parents
20 or 30 years ago. Others beliefs are factoids,
things that appear to be true but really are ideas
planted by mortgage industry marketing propaganda.
Let me give you some simple examples of popular
folklore:
- The
best loan is the most popular one.
- When
refinancing, the objective is to lower your payment
- If
you can find a lender offering a no-point or no-cost
loan, it's a good deal.
- To
determine the best deal, evaluate each lender’s
APR.
- When
shopping for a loan, it's important to check a
number of lenders to get the lowest cost.
My
guess is that almost everyone believes these myths.
Sadly, they are all WRONG, meaning if you follow
them, you will end up paying more than other people
who make better choices. You will pay more over
the years and you will be in debt to the industry
for a longer period of time. This is exactly what
the industry wants and what you do not want. More
to the point, the purpose of these myths is to disguise
the fact that they INCREASE the amount of interest
you pay, exactly the opposite of what you want.
You want to DECREASE the interest you pay.
You
might be skeptical, so let's examine these in more
detail.
The
popularity of loans changes as we go through various
cycles. For a long time, the 30-year fixed, fully
amortized loan was the most popular. The good feature
for of that loan is that it provides long-term rate
protection, and for some borrowers, that’s ideal.
But most people are in their current homes for only
5 to 10 years. When you choose a 30-year fixed mortgage,
you have to pay about 0.5% more every year for that
long term rate protection. If you move after 10
years, you paid an extra ½% per year for 20 years
of rate protection that you didn’t need. On a $400,000
loan, $2,000 every year for 10 years is $20,000
wasted money!
Because
borrowers’ needs vary so much, and the nice thing
for them is that there are now many loans to choose
from. When you do your planning, be realistic about
how long you are going to be in your home. Choose
a loan that provides rate protection for that period
rather than just settling for the “one size fits
all” 30-year fixed rate mortgage, the most expensive
loan our industry offers.
At
the other end of the spectrum are the so-called
Option ARM’s, the new name for the negative-amortized
loan, currently the most popular loan. People are
schnookered into these loans because they start
out with a very low payment rate, maybe as low as
1% or 2%. That sounds great but the lender can easily
disguise the fact that the real interest rate may
be over 6%. That’s comparable to a fixed rate loan,
and there is no rate protection with the Option
ARM. The unpaid difference between the artificially
low payment rate and the real interest is added
onto the loan balance. You end up owing more and
more.
There
will be a day of reckoning in a few years and at
the time the monthly payment may go up 50%, perhaps
more. If people aren’t really qualified for a regular
loan now, how will they handle the higher payment?
How do you build equity with this type of loan?
By many estimates, half of today’s borrowers are
choosing this loan, apparently unaware of the danger
lurking down the road.
Bottom
line, the “crowd” is currently doing the wrong thing,
again. You don’t want to follow them. When you make
decision, determine your goals first, and get the
loan that gets you meet those goals.
In
the next few weeks we will explore the other myths.
Stay tuned!
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