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How Mortgages Work

Know It Inside and Out!

Getting a mortgage is the smartest and dumbest thing we will ever do with our money.

What's smart about mortgages:

  1. Real estate, historically, is a very safe investment.
  2. The rate of return on investment for houses usually greatly exceeds just about any other safe you could make. In my area, properties tripled in value over the last 15 years.
  3. Your rent now goes toward an investment.
  4. You can deduct all interest paid on your primary home from your taxes. A huge plus.

What's dumb about mortgages:

  1. On an average mortgage, you'll pay the principal off 3 and a half times.
  2. Most people go in with the sense of once I have my mortgage I will pay it off in that manner for life.
  3. Many people thank the bank for giving them a mortgage. You need to realize that they are competing for your business, make them work.
  4. If you don't have enough equity, mortgage companies will make you pay for Personal Mortgage Insurance. This insurance in no way pays you, only the bank.
  5. Closing costs are outrageous. You're usually looking at anywhere from $6,000 to $20,000. I can totally understand about $3,000 of the charges (title search and local recording fees.)

1. How much can you afford?

Make it as simple as possible. Look at last month, how much did you make and how much did you spend? Come out with what you can afford a month.

2. What are the taxes?

Don't forget to add taxes and find out what you can handle. Taxes play a huge role in that. Take the total taxes break it into a monthly payment.

For example $6,000 per year in taxes = $500 per month

Now add the month cost of the monthly home payments.

This is where they get you. You see a beautiful house and it's $450,000. Wow, the 30-year payment monthly is only $2,100 a month.

But, they forgot to tell you about the $500 a month taxes you owe. Then they forgot to tell you that taxes grow up each year. You may be able to swing $2,600 now, but what about 10 years from now when your taxes are $10,000 per year? Can you afford a $2,993 a month payment?

Mortgage Tricks Lenders Play

If figured I would offer up some tricks you can play on lenders to get more from them and also the tricks they will most likely play on you.

Tricks that Brokers and Lenders will try on you:

1. Bait and Switch-

Never call a lender based on an ad you saw. They never intend to satisfy the offer they propose or they put such contingencies on the offer that no one could ever possibly obtain that offer.

For example: I saw a recent ad for a loan at 5.5% for a 30-year, zero point mortgage.

Reading the fine print:

A. You must close the loan in 30-days (The Title alone takes over 40 days to clear in my area.)

B. It must be for a $750,000 mortgage with at least 50% down (How many people have $375,000 laying around).

C. The loan has a $3000 application fee (Are they kidding?)

2. Broker Lock-in Fees

Many brokers will charge their clients a fee to lock in a rate, but never tell the bank. This way the are pocketing close to $1,000 for doing nothing, but charging a fee. Tell all brokers, if the bank requires a lock-in fee, you want it in writing from the bank.

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