Five Smart Mortgage Steps

A mortgage is the largest debt most real estate buyers and property owners incur and a debt that most of them know the least about, so many may miss out on opportunities to save on interest as they borrow:

1. Beyond Interest Rates

Yes, it matters which rate is used to calculate the mortgage interest you have to pay the lender for the privilege of using their money to purchase or own your real estate. Yes, a rate that is 1% lower may save you thousands over the life of your mortgage. However, factors that determine your mortgage qualification, like your current debt load, may give rise to significant differences regarding the mortgage features you are eligible for and, therefore, how much you spend in interest over the years.

For instance, mortgage contract features like prepayment may offset or override fractional differences in interest rate to reduce overall interest cost. Experiment with an online mortgage calculator to arrive at estimates of how much what you don’t understand may cost. Your mortgage professional will help you decide which contract features will be most useful to you.

2. Start Now To Prepare For Mortgage Decision Making

Until you understand the criteria involved in selecting a mortgage lender and negotiating a mortgage contract, you cannot make smart money-management decisions. You may choose to attain this knowledge yourself or to invest time in finding the best possible mortgage advisor. The more you understand about mortgages, the more effectively your professional or team will be able to communicate with you.

If you are a last-minute person, you’ll wait until rates definitely start to increase before you begin to act in your own best interest. Not a productive strategy.

Media hype, financial services marketing pitches, and high-pressure sales will increase your stress levels, but they won't prepare you to take sensible financially-sustainable action. Your choice? Tackle interest-related issues now, on your own schedule, or delay until big decisions are forced on you.

Pat on the Back: Congratulations if you are already working with a certified mortgage, housing, or financial professional or team. Searching out individuals who spend their careers helping consumers uncover answers and alternatives for essential financial planning issues like mortgage financing is time and effort well spent. Mortgage brokers, HUD-certified housing counselors, real estate professionals, and financial advisers are among those trained to help you determine the impact of higher interest rates on your finances and future before rates rise!

3. The More You Learn, The More You’ll Want to Know

Where did you learn what you know about mortgages? Since you left school, what efforts have you made to raise your personal financial literacy level?

“Financial literacy describes the skills, knowledge and tools that equip people to make individual financial decisions and actions to attain their goals; this may also be known as financial capability, especially when paired with access to financial products and services.”

For instance, do you know what principal and prepayment mean to borrowers? (See definitions in Part 2.) These basic concepts should be part of your vocabulary, so you can understand and retain more from the professionals you talk to and the financial material you read. Expanding your vocabulary will also enable you to ask solid interview questions, so you can determine which professional can genuinely help you and not just shoot you a great sales pitch or con you.

Here are reliable no-charge places to start:

• The Consumer Financial Protection Bureau (CFPB) is “a U.S. government agency that makes sure banks, lenders, and other financial companies treat you fairly.”
  • Visit CFPB on mortgages and on the CFPB blog regarding lenders: Seven examples of unfair practices and other violations by mortgage servicers: CFPB supervision activities uncover red flags
  • Explore the range of topics on the CFPB site and blog: New rule ensures mortgage servicers provide options to potentially vulnerable borrowers exiting forbearance

• US Department of Housing and Urban Development (HUD) Office of Housing Counseling  and HUD Approved Housing Counseling Agencies
  • HUD sponsors housing counseling agencies in your state that can provide advice on buying a home, renting, defaults, foreclosures, and credit issues. You can also search for a reverse mortgage counselor or, if you are facing foreclosure, for a foreclosure avoidance counselor. 
  • HUD Exchange - Resources and assistance to support HUD's community partners

• Freddie Mac Borrower Help Centers and Network
  • Freddie Mac’s HUD-certified housing counselors can assist you “if you are struggling to make your mortgage payments and help you prepare for successful homeownership.” Free phone assistance is available through the national Freddie Mac Borrower Help Network at 877-300-4179 or one of the Borrower Help Centers listed on the site.

• US Department of The Treasury
  • Interest Rate Statistics 
  • Financial Literacy and Education Commission and its national financial educational website and also in Spanish

4. Caution Selecting a Lender

Avoiding high pressure sales, scams, cons, and fraud should be a no-brainer, but your success with this relies on you staying skeptical, even suspicious. Not every offer of mortgage financing, even the friendliest ones, can unquestioningly be relied on or trusted.

Don’t let your guard down while you search for and sign up with the best possible lender. You may want to relax your guard with mortgage lenders and professionals, whom you feel you should trust and whom you hope will put your interests before their own, but you can’t afford to blindly assume you’ll receive ethical behavior. Stay skeptical! Ask questions and listen to the answers (ideally, this means recording conversations or taking notes). 

• Read before you sign: You can understand mortgages even if you are not great at math. Persist in requesting an understandable explanation until you fully grasp what is going to happen, what you are agreeing to do, and what this will cost you. Once you sign, you have made an expensive commitment; before you sign, you are learning what the mortgage contract legally binds you and the lender to do and not do. Take the time you need to be sure.

• Who is involved?: In Step 3, you were presented with a number of HUD-approved counselors and agencies to assist you with locating legitimate, credentialed mortgage and housing professions to help you with the wide range of mortgage issues that homeowners and buyers face. Licensed mortgage professionals like members of the National Association of Mortgage Brokers are excellent resources for you. Use the expertise of mortgage professionals to your advantage. The best of them love talking about mortgages and helping borrowers understand how these financial tools work and how costs can be managed.

Caution: > If something seems too good to be true, be very skeptical and check further. For example, don’t pay up-front fees or special charges to non-lenders.  

> Avoid mortgage offers that do not come from accredited professionals since they could be scams or fraud. Verify the credentials of those involved in your mortgage work and keep a copy of their business card or contact information for future reference.

• Signing up before you fully understand what you are getting into can be unnecessarily expensive, for instance:

1) ARM or adjustable rate mortgages and interest-only mortgages offer financial advantages when rates are stable or falling, but can become expensive if interest rates are on the rise.

According to the Federal Deposit Insurance Corporation, “ARMs or adjustable-rate loans, also known as variable-rate loans, usually offer a lower initial interest rate than fixed-rate loans. The interest rate fluctuates over the life of the loan based on market conditions, but the loan agreement generally sets maximum and minimum rates. When interest rates rise, generally so do your loan payments; and when interest rates fall, your monthly payments may be lowered.” 

Caution: In 2023, a change will occur to ARMs that should be considered before then.

2) According to the Mortgage Bankers Association, forbearance “is a temporary pause of your mortgage payment. The payments are not forgiven; you will be required to repay any missed payments. Ask your servicer about your options for making up the missed payments after the forbearance period is over BEFORE you choose to move forward with a forbearance plan.” This payment delay can prove very expensive.

• Home buyers and sellers may be susceptible to lenders' often game-based online “Experience” pathways. These sales funnels and marketing tools appear to put the borrower in control of researching mortgages by letting them choose a digital path to follow. In fact, users are exploring only that lender’s products in an elaborate sales context. Borrowers are not discovering all the mortgage products available in the marketplace nor are they necessarily being matched with the overall best products for their needs.

Borrowers are inside the lender’s system, disclosing personal information and preferences, busy believing what the lender wants them to. For example, as borrowers go through online pre-qualifying, applying for a new mortgage, or inquiring about refinancing, they reveal a lot about themselves and unwittingly acquire the lender’s bias and play by the lender’s rules and terms.

Be skeptical and consider talking to a housing counselor or mortgage professional to get your bearings about mortgages before you shop online or off to find the best lender for your needs.

5. Think ahead: Pay the debt off faster

An online mortgage calculator quickly reveals how reducing the principal by even a few thousand during the life of your mortgage loan can save a lot of money otherwise wasted on interest. 

When you receive a “friendly” offer to lower monthly payments, skip a payment, or extend the amortization period, you are giving the lender much more interest over time, even though you may feel they’ve done you a big favor!

The amount of interest paid can be reduced, for example, by arranging:

1. A shorter mortgage term to accelerate repayment

2. Extra principal-interest payments through prepayment or paying down early on renewal

3. Additional principal-interest mortgage payments, even adding one more per year will reduce interest costs

4. A significant lump-sum payment to reduce the principal. Interest rate and term remain unchanged, but re-amortization reduces monthly payments. The lump sum may come from a real estate sale, an inheritance, or a windfall.

Use Glossaries to expand your mortgage vocabulary:

Expand your mortgage vocabulary and you’ll understand mortgage dos and don’ts more quickly. Googling individual terms to learn their meaning can have you accepting definitions without understanding the bias of the source.

Explore compiled Glossaries of Mortgage Terms and How-to Guides to understand the complete context of mortgages. Browse the lists of terms and you’ll see how all the mortgage “pieces” fit together.

Here is a sample of definitions and Glossaries:

Principal: “The principal is the amount of a mortgage loan that you have to pay back. Your monthly payment includes a portion of that principal. When a payment on the principal is made, the borrower owes less, and will pay less interest based upon a lower loan size.” From the Consumer Financial Protection Bureau’s Mortgages Key Terms and Mortgage Basics

Prepayment: “Prepayment is an amount paid to reduce the principal balance of a loan before the principal is due.”

• Note: “Prepayment penalty: A penalty assessed by some lenders if a loan is paid off before the specified term. This is a lump-sum amount due and payable in addition to the loan balance, and is usually limited to the early years of a mortgage.” From Bank of America’s Glossary of Mortgage & Lending Terms

Title: “The legal evidence of ownership rights to real property.” From the National Foundation for Debt Management’s Glossary of Mortgage Terms.

Caution: Always consider the compiler of a Glossary, “Borrower Experience,” How-to Guide, or marketing material to reveal bias, motives, and hidden agendas just as you must do with all online searches on which you rely. 

Will you be mortgage-ready before you want to, or have to, sign a mortgage contract and start paying interest?

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