Common Mortgage Myths

MYTH 1:  All mortgage companies are made up of knowledgeable, professional, and honest people that try to provide the best loans and services to meet your specific needs.

Many companies are made-up of honest people that provide the same products to all their customers, and don't know how to determine if those loans are really in the best interests of their customers. (Most companies fall into this category). Unfortunately, there are also many companies that appear to be competent, but whose goal it is to give you the loan that makes them the most money, whether or not it's in your best interests.

MYTH 2:  All loan officers can find me the same loan.

All loan officers can do loans, but most don't have the tools to identify the best loan for your situation. Many don't even know if the loan they are offering is better for you than the one you already have. Here are some things your loan officer should ask you:

1. When do you expect to sell, pay off the home or refinance again? (This is the most important & most neglected question!)
2. Are your current payments comfortable or too high?
3. Do any of your current loans have a pre-payment penalty?
4. Do you want to pay off your loan quicker or keep the tax write-offs?
5. What is your goal: Lower payments, pay off your house, consolidate debt, or another goal?

Make sure to ask your loan officer the following:

1. How can I track the progress of my loan application?
2. If I authorize the loan today, when can I expect to close?
3. Compared to my current loan, what will my balance be if I sell my home in x years?
4. Can you give me a worst-case amortization table? (For an Adjustable Rate Mortgages (ARM) only)
5. Can I track my loan balance from month to month? How?

MYTH 3:  No-cost / no points makes for a cheaper / better loan.

Closing costs are often the most misunderstood part of the loan process. When asking about closing costs you might hear these amounts from different mortgage companies for the same loan: $2,000, $3,500, or $6,000. Which is right? Why is there such a difference? It's important how you ask the question. So called "no-cost" loans are often the most expensive because they come with higher interest rates.

There are two types of loan costs: Closing Costs and Pre-Paids/Reserves.

Pre-Paids/Reserves: These "costs" are the same no matter whom you do business with. They include VA Funding Fee's, Insurance and Tax Escrows, Pre-Paid Interest, Mortgage Insurance, etc. If you have your taxes and insurance paid through an escrow account, the Pre-Paids/Reserves will be higher. If not, they will be lower. The only way to save money here is to get cheaper insurance. Never use these costs when comparing loans, since they should always be the same. If there is a difference, one of the companies has calculated it wrong, possibly to gain a favorable comparison. When it is corrected at closing, it can affect your costs and payments negatively. You cut out the tricks by not using this portion in your comparisons.

Closing Costs: "Closing Costs" include things like appraisals, processing, underwriting, title insurance, subordination, etc. Mortgage companies don't generally make anything on these. The closing costs that are within the control of the mortgage company are the Origination and Discount Fee's. This is where they get their compensation, but what you see is not necessarily what they get since rate pricing also comes into play. Don't be fooled, nobody does loans for free. If there are zeros in Origination and Discount, it's because they are getting paid by the bank through the rebate associated with a higher interest rate. To make an accurate comparison, ask for all the "closing costs" but not the "Pre-Paids & Reserves" then make sure you get accurate answers by asking questions about each cost.

MYTH 4:  The best loan is the one with the lowest interest rate.

Loans with lower interest rates almost always have higher closing costs. Higher closing costs can eliminate the benefit of a lower interest rate by increase your mortgage balance.

MYTH 5:  The best loan is the one with the lowest payment.

Low payments generally come with the lowest rate or with an adjustable rate, which may not remain low over a long period of time. It is important to determine what your goals are. For example: Do you prefer a low monthly payment with higher closing costs or a higher monthly payment with lower closing costs?

MYTH 6:  I will save money if I can refinance.

You should refinance when it saves you money. You should never refinance when it doesn't. In general, larger loans save with even a small rate decrease, while smaller loans need a greater difference in interest rates to have any impact at all. The age of the loan doesn't generally matter unless there is a pre-payment penalty. Use the following guidelines to determine if it makes sense for you to refinance:

• I can reduce my interest rate by at least .50%
• My loan is at least 12 months old
• My current mortgage doesn't have a pre-payment penalty

MYTH 7:  The cheapest loan is the best loan.

There are many factors that come into play when selecting the best type of loan for your situation. Some of the most important are:

• When do I expect to sell my home (or pay it off)?
• How much cash do I have available?
• How much cash do I need in the near future?
• How much equity do I have in my home?
• What payments can I afford today, and in the future?
• What tax deductions do I need?

Below is a small list of some of the most common loan types, and the situations that they are often right for. However, there is no substitute for the advice of a trusted mortgage professional.

Situation	Loan Type
Selling within 3 years	1/1 ARM (Adjusts annually)
Selling between 4-5 years	3/1 ARM (Fixed for 3 years, then adjusts annually)
Selling within 7 years	Fixed Rates Loan at or around par
No plans to ever sell	Invest in the lowest rate available
Retired, need tax deduction	Interest Only Loan
Bad credit	Sub-Prime Loan
Elderly, with equity, no retirement	Reverse Mortgage
A large amount of debt	Debt Consolidation Loan
Small down payment	FHA Loan
Military Vet w/no down payment	VA Loan
High monthly cash flow	15 Year Loan
No money down	Grant Program Loan
Self Employed/Commissioned	Stated Income Loan

MYTH 8:  Banks/Credit Unions are better than brokers -- Brokers are better than banks/Credit Unions.

With regard to costs, rates and flexibility, a broker will win every time. Two specific reasons to use a bank rather than a broker are if you have a strong relationship with a specific branch and a trust for the people who work there, or if you need to close in a very short period of time (As a direct lending source, banks can often close more quickly than a broker). This does not mean you get better pricing or rates with a bank, however, since bank procedures are generally pretty stringent.

Here are some specific differences between banks and brokers:

• Banks only quote their own rates. Brokers shop many lenders for the lowest rates, and win every time.
• Banks underwrite their own loans and typically have less flexibility with regard to the types of loans available, and credit requirements. Brokers can repackage and resubmit loans to different types of lenders if needed.
• Banks have a list of loans they offer. Brokers offer loans from many banks and have more options.
• All banks have reputations for either good or bad customer service. Brokers can, and often do, steer loans toward the more customer friendly lenders.

MYTH 9:  Comparing loans is easy.

The Truth-In-Lending (TIL) statement is a helpful comparative tool, but only when the loans are the same in these areas:

• Interest rate
• Term (number of years)
• Cash component (down payment, cash at closing, cash-out, etc.)
• All costs correctly calculated (this is the hardest area)

Rate prices change everyday so two TIL statements produced by the same company, even just a day apart, will be different. The only way to make an exact comparison is to get all your quotes at the same time.

When comparing dissimilar loans, make sure to request a Good Faith Estimate from your loan officer and have them explain all of the costs associated with your desired loan options. You should also have your loan officer explain the payment options and specific terms of the loans you are considering.

MYTH 10:  When refinancing, it's OK to skip the final payment.

Many people skip the last payment of their current loan believing that the new loan will pay it off on time. This is often done at the instruction of the mortgage company. The best advice is to keep making your payments until you have a firm closing date. If the loan doesn't close on time, it creates a 30-day late on your credit, sometimes making you ineligible for the new loan.

MYTH 11:  It's best to lock in rates early.

Locking in a mortgage rate is much like buying a stock -- timing is very important. But there are many more factors to consider. Rate locks have an expiration date. If your rate expires and rates rise during the lock, you miss the lower rates. On the other hand, if rates fall, you will still get the higher rate.

Locks can range from 5 to 360 days. Typically, the longer the lock, the higher the upfront costs and/or interest rate. Companies that take a long time to process require longer and more expensive locks.

If your mortgage company tells you they are locking your rate on the day they take your application, they are either not being truthful or not being smart. Mortgage companies are measured by how many locks actually become loans and it's not a good idea to lock a rate for an application that has not been approved.

After your application is preliminarily approved, you can lock your rate anytime. Keep in mind, however, longer locks are more expensive. It's difficult to predict rates too far in advance but one daily indicator is the 10-year T-note. When it goes up, the mortgage rates for the next day often come down, and vice-versa. Once your rate is locked, keep track of the expiration date, and make sure your loan closes before then.

MYTH 12:  I can predict where rates are headed.

No one can really predict where interest rates are headed. A key predictor of interest rate direction is inflation. High inflation generally leads to higher rates and low inflation leads to lower rates. The following are some key indicators that influence interest rates:

Mortgage Bonds	Interest rates are primarily driven by Mortgage Bonds, as opposed to the 10-year Treasury Note. While the 10-year Treasury Note sometimes trends in the same direction as Mortgage Bonds, it is not unusual to see them move in completely opposite directions. Do not work with a lender who has their eyes on the wrong indicators.
T-Bills & Notes	This is a quick and easy indicator to watch. If the Fed is selling Treasury Bills and Notes, their prices decline and rates generally trend upwards. If the Fed is buying, their prices rise and interest rates typically trend down.
Federal Funds Rate/Discount Rate	The Fed may raise these two rates in an effort to curb spending, or lower them to spur spending. This has the most direct affect on interest rates
Reserve Requirements	The Fed may increase or decrease the amount of funds banks are required to hold in reserve. An increase means banks can lend less, causing rates to go up. A decrease means rates will drop.
The Core Consumer Price Index (CPI)	This tracks the retail prices of goods and services and is an important indicator of inflation.
Employment Cost Index (EDI) (Average Hourly Earnings)	The ECI tracks changes in wages, salaries and benefits, and the AHE shows monthly wage changes. Increasing labor costs can force businesses to raise prices to compensate, spurring inflation.
Gross Domestic Product (GDP)	GDP is the nation's total economic output. When growth is too strong, it can cause demand for goods and services to exceed supply, which fuels inflation.
Advance Retail Sales	This tracks retail sales. If consumers spend too much, too quickly the economy grows too fast, driving inflation.
New Home Sales/Existing Home Sales	These two reports show consumer demand for homes and loans, and track home prices, which is another indicator of inflation.

More than likely, this is one of the largest and most important financial transactions you will ever make. You might do this only four or five times in your entire life, but we do this every day. It's your home and your future. It's our profession and our passion. We're ready to work for your best interest.