Avoiding Predatory Lenders and Subprime Mortgages
Author: John Published Under: Business
One of the major factors that led the collapse of the real estate market was predatory lending and subprime mortgages offered to those who were not truly qualified in the first place.
These liar loans were offered by companies that were creating packages of mortgages and then selling them to investors pretty much as quickly as they could put them together. Since they were only going to hold them for a very short period of time, the mortgage lenders did not feel compelled to check the qualifications of the borrowers, as there was little risk that they would default until they had long since been passed on to other investors.
While there is plenty of blame to go around, perhaps a better approach than trying to find fault, is to help make people aware of what subprime mortgages are and how to avoid predatory lending.
Penalties for Paying the Mortgage Off Early
A mortgage lender makes their money off of the interest paid on the loan. Often, this ends up doubling the cost of a home over thirty years. So, in truth, if a mortgage lender allows someone to pay off a mortgage early, then they are literally loosing money.
To this end, subprime mortgages typically include some sort of penalty for paying the mortgage off early. This may be in the form of outright prohibiting the mortgage owner from paying the loan off early in any situation, charging stiff penalties for doing so, or only allowing a certain set amount of extra payments each year.
One of the most important questions to ask a lender is whether they charge a penalty for paying off the mortgage early and if they do, you are almost always dealing with a subprime mortgage.
Negative Amortization Loans
Another type of subprime mortgage is the negative amortization loan, which snares unsuspecting borrowers by exceptionally low interest rates and monthly payments. In truth, however, the interest rate is much higher, but the person is given the opportunity to pay less each month and instead have the remainder tacked onto the end of the mortgage. Of course, this in turn raises the principal of the mortgage, which also raises the monthly costs. Eventually, over a very short period of time, it is end up owing much more than you did when you took out the mortgage.
Power of Points
Points are how a mortgage broker makes their money and are simply a percentage of the total amount of the loan. For instance, on a $100,000 loan, if you paid 10 points, you would be paying your mortgage broker $10,000. Since the amount of points is basically profit for the broker, they will often offer to charge lower points. However, points are also often used to swindle unsuspecting borrowers, who are told that the points are there because the loan was very difficult to get or required a lot of leg work for the broker. Of course this is an outright lie, as if there were no room for profit, they would not have offered you the loan in the first place.
However, if you are not getting something out of paying these points, you are being robbed. Instead, paying points should only be done in return for lowering the interest rates and a no-point loan should always be offered. Otherwise, there is little doubt that the lender is predatory.