November 21, 2017
 
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Mortgage Refinancing Scams - It’s all in the Advertising

While there are many factors to consider, refinancing your home mortgage should only be done if you’re certain you’ll save a significant amount of money. Doing the math can be complicated, which is why it’s so crucial to find an honest and educated lender who can help you determine if it would be a benefit for you. When the market is favorable for refinancing, homeowners often flock to lenders or brokers. However, good intentions can turn into a disaster if you’re not careful.

A busy market can not only cause new mortgage companies to spring up, but predatory lenders come out of the woodwork with the hopes of making some money. Some lenders resort to misleading advertising in order to lure customers. Here are some examples:

1. “Zero Closing Costs” Loans—this really means “no out of pocket” costs at closing. The lender will pay the fees for you, and then recoup the costs later, plus more, by charging you a higher interest rate. Interest rates can be about .25 % to .50 % higher. Or, the closing costs are rolled into the mortgage, which isn’t always a good idea unless you don’t mind paying closing costs for the next thirty years. Let’s say closing costs are $3,000 and you roll it in to your mortgage. Your interest rate and addition principal, compared to what it would have been if you hadn’t financed the closing costs, raised your monthly payment by $100. Over the course of five years, you’ll “overpay” by $6,000, with the intention of saving $3,000 at closing. It’s not a wise financial decision. The point is that any advantage you gain from refinancing is lost when you roll in the closing costs. Remember, nothing is given away.


2. Low annual percentage rates, or APR’s—advertisements don’t go into detail about how they came to such a low APR, but they use it to get you in the door. Various factors go into determining a rate. Credit Scores will be looked at; the lower the score, the higher the interest rate. Lenders can offer a very low rate, but have to charge points on top of the loan. A point is a fee equal to one percent of the loan, so a two-point fee on a $150,000 loan is $3,000. When you use an advertised APR to comparison shop, make sure you read the fine print and compare apples to apples.

3.Aggressive and Deceptive Marketing—predatory lenders use sophisticated research and databases to identify particularly vulnerable borrowers and then contact them by mail, telephone, or even on their door step to encourage them to refinance. Minority, low-income, no income, and elderly homeowners are often the targeted market. Dangling fast cash in front of them, homeowners are pressured to refinance for cash. Most likely, they don’t understand what they’re signing and end up losing any equity they may have had.

4. Bait and Switch—this is one of the oldest tricks in the book. A dishonest lender will advertise a great deal but then tries to get you to take a different deal that isn’t as good. They’ll explain that the ad was a mistake. Bait and switch can also happen throughout the loan process, even right before closing. Borrowers must scrutinize closing documents before sitting down at the table, pen in hand.

 

The best advice is don’t believe everything you read or hear. Even a Good Faith Estimate is subject to change. Seek help to review loan papers before signing anything. As a homeowner, it’s your responsibility to know that refinancing can involve great potential for hidden costs, fees, and unfair loan terms. 

 

 

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