Mortgage companies do not offer loans for free. Some lenders use fair and reasonable fees, interest rates, terms, and conditions. Other lenders, however, are out for your lifeblood.
Recently, the Consumer Financial Protection Bureau started a project to crackdown on unethical lenders who use a consumer’s lack of knowledge to take advantage of them. These unethical companies break federal laws in their daily operations. Consumers are getting wise to their tactics.
If you don’t want to end up paying tens of thousands of dollars extra over the life of a mortgage loan, focus on how these companies make their money from you and stop them before they start. Let’s look at the ways mortgage lenders and brokers make their money off of you the consumer.
Origination Fees
Mortgage lenders make large amounts of money from you by charging extra fees. These are sometimes called origination fees, but lenders get sneaky and call them by other names or even roll them into your interest rate without saying anything about it. It is important to be able to spot these extra fees so that you can negotiate the best mortgage possible.
The best way to make sure you are not taken advantage of is to shop around. Pay careful attention to the closing cost details in the estimate that they are required by law to provide. If there is no estimate sheet after you have applied for a loan, walk away immediately.
When you check out the deal they are offering, notice every line item and ask about what each charge is for. Everything listed under “Origination Fees” is negotiable. Sometimes, these fees may be called administration, underwriting, processing, document preparation, or appraisal review fees. There may be more names, so watch out for any fees that are not completely understood and reasonable.
Lenders Charge You Interest First
A mortgage loan payment is made up of 2 parts:
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the principal (this is the amount the home costs)
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the interest (this is what the bank is charging you for using their money)
In the beginning of paying off a loan, your entire payment is only going toward the interest portion of your loan. You are not yet paying the actual amount that you owe (the principal)
You pay interest on a mortgage first because the lender makes more money from you this way. Since you’re not paying on the principal of your mortgage to begin with, the interest you owe compounds (increases exponentially) and is more than it would be if you were paying down the principal first.
How to Defeat Loan Schedules
To defeat their sneaky way of making money on your mortgage by charging only interest in the beginning, only take out a loan that you can pay double on every month. Every time you pay your mortgage (interest portion) go ahead and make another payment of the same amount but make sure it is applied to your principal. Check your statements to be sure it was applied correctly to the principal and not the interest.
Even contributing a small amount toward your principal each month can take tens of thousands of dollars and several years off your mortgage! Let’s look at some examples.
Let’s say you buy a house today for $200,000. Your loan term is 30 years with an interest rate of 3.5%. If you pay your mortgage of $898.09 as written on your bill each month, you will spend 30 years paying off your mortgage and pay a total of $323,312.18 over the life of your loan! You will pay $123,312.18 to the bank in interest monies for the privilege of using their money for 30 years.
However, if you have the same loan and pay $1702.91 every month (making sure the extra payment goes toward your principal), your same loan will be paid off in 12 years! The entire amount paid for your house with principal and interest will only be $245,219.04. You will save $78,093.14 in interest fees!
This is just one example of how you can save more of your money while taking out a mortgage. To apply different scenarios to your own numbers, look at a customizable amortization schedule for mortgages or check out NerdWallet Mortgage Calculator.
Tricks Unethical Mortgage Lenders Engage In
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Not providing critical, accurate, and timely loan information
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Engaging in misleading representations, omissions, or practices toward borrowers
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Requiring documents verifying information relating to the consumer’s residential-mortgage-loan application before providing a Loan Estimate
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Lies and omissions regarding whether the consumer had been preapproved or guaranteed for a particular program or term
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Misrepresenting what terms the consumer was likely to obtain for refinancing, in violation of the MAP Rule and CFPA
How To Stay Ahead of Unethical Lenders
Study any contract you sign and be sure the lender is not violating laws that protect you as a consumer. Knowing your rights as a borrower can make all the difference financially when you apply for a mortgage. Read through some of the laws that protect you as a borrower that include:
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Truth in Lending Act (TILA) that protects you against inaccurate and unfair billing practices. It requires lenders to provide you with loan cost information so that you can comparison shop for certain types of loans.
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Fair Credit Reporting Act (FCRA) that regulates the collection of consumers’ credit information and access to their credit reports. It was passed in 1970 to address the fairness, accuracy, and privacy of the personal information contained in the files of the credit reporting agencies.
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Equal Credit Opportunity Act (ECOA) prohibits creditors from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age, because an applicant receives income from a public assistance program, or because an applicant has in good faith exercised any right under the Consumer Credit Protection
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Mortgage Acts and Practices—Advertising Rule (MAP Rule) designed to prohibit misrepresentations in a commercial communication regarding mortgage products.
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Consumer Financial Protection Act of 2010 (CFPA) supervises certain financial firms and enforces laws against unfair, deceptive, abusive, or otherwise prohibited practices relating to most consumer financial products or services. It also provides for improved financial disclosures, including integration of mortgage disclosures.
Don’t Go It Alone
If you have been taken advantage of by a ruthless and unethical loan company, you can seek injunctions against the defendants by reporting unethical behavior to the FTC so that the lender faces disgorgement of ill-gotten gains and the imposition of civil money penalties.
You can also contact a knowledgeable and experienced consumer protection attorney and sue for damages. Don’t let unethical lenders steal from under your nose without taking action. You can find justice for the way they illegally manipulated you. Many consumer protection attorneys offer free consultations and may even take your case on contingency. If you need counsel, reach out to an attorney in our Law Zebra network who understands whether your case has merit and can help you take the next step in finding the justice you deserve.