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Lookout for Lies
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Avoiding Overcharges
Truth in Lending


Lies to Look Out For

When shopping for a mortgage, borrowers must be very careful. Brokers and lenders often have an incentive to lie in order to make more money, so you must be on the lookout for these deceptions.

The first lie you should be aware of is a false statement that there is no prepayment penalty. Prepayment penalties are financial penalties imposed when you attempt to pay off your mortgage early, usually through refinancing. It is true that some borrowers will later claim they never agreed to a penalty when, in fact, they actually did. However, brokers also have an incentive to lie about a prepayment penalty and collect an additional half a point or full point for themselves. The Truth in Lending (TIL) disclosure form indicates whether there is a penalty or not, but many borrowers don’t read it. Make sure to check your TIL to confirm you do not have a prepayment penalty.

Another common lie brokers tell is that the rate is locked. Brokers have an incentive to do so because longer locks come at a cost of more points. Brokers will wait to lock and keep the extra lock fee for themselves. They justify this by saying they assume the risk of rising interest rates, rather than the borrower. This works as long as rates stay relatively stable.

However, if rates spike, borrowers could be left in the position of either being stuck with a higher rate or having to cancel the transaction. This is why borrowers should insist on a lock commitment letter from the lender to the borrower.

Loan providers also sometimes lie about market price on the day of the lock. Don’t accept the price blindly. Monitor changes in market price between the day you commit to the loan and the day you lock to make sure you aren’t getting ripped off.

You should also be wary of lenders who insist you should take an FHA mortgage. Often they specialize in FHA loans and don’t want to lose your business, or get a higher fee on FHA loans. The rule of thumb is if you can afford to put five percent down and have good credit, don’t let anyone steer you to an FHA without considering other alternatives.

 

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