If a Mortgage Sounds Too Good To Be True, It Probably Is
While mortgage rates may have come down a little bit from their recent 20-year high, they’re still higher than many homebuyers would like. That makes it tougher to find an affordable home loan in the Charlotte, NC, area, and it’s understandable to want to find the lowest mortgage rate possible.
But as you’re shopping, remember: buyer beware. When you come across a mortgage rate that sounds too good to be true, it probably is. There are lenders out there who try to bait customers using unrealistic rates—only to produce a loan that won’t close, or burying you in fees and red tape.
Learn what to look for to avoid these problem lenders, and how to find a mortgage you’ll love.
Mortgage red flags
When you’re beginning the mortgage process, whether you’re shopping for a new mortgage or a refinance, there are some “red flags” that you should watch out for. If you encounter any of these, think twice. You’ll probably be better off with another loan.
Unbelievable rates: These are the rates that are way, way lower than the rates you’ve seen when comparison shopping. If you’re seeing mortgage rates for 7% or 8% and someone comes along offering 4%, be skeptical.
Unclear mortgage product: You might think you’re seeing a great rate for a conventional, 30-year fixed-rate mortgage. But are you? Or is it another type of loan with different terms, such as an ARM (adjustable rate mortgage) or something else?
Tiny monthly payments: If the focus is on how small the monthly payments are, look closer. Often these “small monthly payments” can (and will) balloon later, after an introductory period of one to five years. If you don’t read the small print, you could face an unexpected spike in your monthly payments down the road, making your home suddenly unaffordable and putting you at risk of default.
Hard sell: If the sales agent is pushing you to act quickly, won’t answer your questions clearly, or is downplaying the fees or fine print, pump the brakes. The right mortgage specialist will work with you, not against you.
Unsolicited offers: Unlike normal mortgage advertising, these unsolicited offers are often cold calls from untrained sales staff, not actual brokers. They’ll say anything to close the sale, but when you press them for details, they clam up. That’s because they don’t actually know the loan product or its requirements. Pass and look for a trained, licensed mortgage expert to help you.
No closing costs: There’s no such thing as a free lunch, and there’s no such thing as a free mortgage closing, either. If a loan is being advertised to you with “no closing costs,” that probably means the costs are actually being folded into the loan instead, making it more expensive than it needs to be.
No documentation required: Realistically, no lender is going to loan you money for a home without documentation that you are who you say you are, and that you have sufficient income to pay the mortgage every month. That just wouldn’t make sense. If a mortgage lender tells you they don’t require documentation, look closely to find the catch.
Questions to ask your lender
Before you get too excited about a mortgage rate that sounds too good to be true, take a moment to ask the lender some questions. The answers will give you a better idea of how the rate can be so low.
Is the loan an ARM or fixed? Should you expect the rate to change over time? And if so, when, and by how much? Adjustable rate mortgages and home equity loans often have a “teaser” rate that is in place for the first six months or a year. But then the rate can rise, so it’s vital that you know when and how much your rate can change after that. Fixed rate mortgages stay the same for the length of the loan.
What’s the lifetime cap? In other words, is there a ceiling on how high the mortgage rate will go? If so, how will that affect your payment and the overall interest you’ll pay? This might take some number-crunching to see the possibilities and how they’ll affect your loan.
What are the fees? Many times, a mortgage lender will advertise a super-low rate—but then load up the loan with fees and charges that end up costing you as much or more than a regular market rate. Ask about origination fees, prepayment penalties, and any other fees that could add to your costs.
How much are closing costs? Even “no-closing-cost” loans have some costs associated with closing the loan. If these costs are rolled into your loan, you could be paying interest on them, too. It might be better to just save up and pay the closing costs up front.
What’s the catch? It’s OK to be straightforward with your mortgage specialist. If something sounds too good to be true, ask them why. Ideally, they’ll explain the tradeoffs, such as a lower rate in exchange for higher fees, stricter qualifying rules, or something else. Then at least you’ll know what you’re getting into.
What to do instead
You can take some steps to protect yourself from scammy mortgages.
Use our Mortgage Calculator: Input the numbers of different loans into our Mortgage Calculator to see how each combination of closing costs, interest rates and other variables affect your loan.
Look at more than just the rate: Check out all the mortgage terms, including length, rate variability, lifetime cap, index rate, origination fee, prepayment penalty, and credit requirements.
Make sure you actually qualify: Low, low rates can sometimes indicate a “bait and switch,” where the lender will entice you with an unbelievable rate but make it nearly impossible for you to qualify, offering a much higher interest rate instead. Don’t be afraid to walk away if you run into a situation like this. So-called great rates are useless if you can’t actually close on the loan.
Choose a trusted local company: Look for reputable mortgage companies with trained mortgage loan officers. In Charlotte and elsewhere in North Carolina, mortgage loan originators and brokers should have a state license. That’s your signal that they’re experienced and knowledgeable about mortgage lending (as well as the local market and local laws).
Look for real people testimonials: When a mortgage company provides above-and-beyond service, you’ll know! We treat our customers at Fairway Mortgage of the Carolinas like family, and they praise our responsiveness, communication and professionalism. Customer testimonials can give you a great idea on the kind of mortgage company you’d like to work with.
If you’re looking for a community-centered mortgage lender that is always forthright, honest, and upfront about your mortgage, contact the experts at Fairway.