Of all the purchases you will make in your lifetime, a mortgage might be the biggest investment risk. Often a real estate purchase pays off in dividends years later, but only if the mortgage terms are fair. On the other hand, the wrong mortgage can cause your good credit to go off the rails with foreclosure and even bankruptcy. Keep reading to learn more about making wise mortgage contract legal decisions.
Predatory lenders can use different ways to scam you out of money. They come up with new ways to profit from unsuspecting borrowers every year. The scams may go by different names, but they usually have quite a bit in common.
The companies trying to scam you often create a sense of urgency about the loan, making you feel as though you are getting in on a good deal that may go away if you look too closely. Let’s look at some of the types of issues in a mortgage that can derail your good credit.
Fees and Points
One of the more common ways lenders work you over is by adding extra fees and points to your loan. Points are just money that you pay the mortgage company for giving you a lower interest rate on the loan. Fees can range into thousands of dollars for items you did not agree to. Therefore, it is crucial to go over your closing statement with a fine-tooth comb looking for extra fees and points you did not agree to.
Don’t let a charming representative convince you that you’ve agreed to something you’ve never seen or heard of. If it doesn’t feel right, keep asking questions and contact an attorney to discuss the details with you.
If your credit is less than stellar, mortgage companies may offer you a loan with higher interest rates and more fees and points for closing. They do this because you are more likely to foreclose on your loan than someone with good credit. However, the mortgage companies are often responsible for offering you a loan you cannot afford in the first place. They then gouge you for money, knowing that they will eventually need to foreclose with you. This practice is unethical and not good business practice.
Whether you qualify or not, be careful of a sub-prime loan. Getting into one may suck the life out of your paycheck and leave you little in return.
Interest Only Loans
In an interest-only loan, you pay the interest portion of your loan for a set number of years before you even start paying down your principal. When you take out a loan, the interest is what you pay the bank for the right to borrow the principal. The principal is the amount of loan you need. Adding them together makes your total loan amount.
With most loans, you begin your monthly payments paying mostly interest and some principal each month. In an interest-only loan, you are not paying principal for the first 7-10 years. In this type of loan, you don’t begin to own any portion of your home equity until you start paying down your principal. As a result, you’ve paid off a 1/3 of your total loan before you get any ownership!
It is almost like you are renting your house with an interest-only loan – you are not gaining equity or value as your loan matures. An interest-only loan is normally a bad investment decision.
Often a bank will offer a loan where in exchange for a lower payment now, you will owe a set amount, sometimes the rest of your mortgage on a certain future date. Balloon loans are risky because you are literally banking on having that large windfall to pay a future large amount. If you cannot pay your balloon payment as agreed upon in the contract, you can lose your home. The loan originator may play down the risk, saying that you can refinance before that time, but the future is always uncertain, and risk this size could mean you lose it all.
Make Wise Decisions
If you are considering a mortgage on a home, contact an experienced real estate attorney. At Jarrett Law, our focus is real estate, and we know how crucial a mortgage contract is. We take the time to understand your real estate goals and how to meet them without landing in a mortgage money pit. Contact us today for a free initial consultation and find out how we can help you save money while buying your home.