Mortgage Tricks, Traps, and Scams
Over the years, mortgage lenders and brokers have developed some
effective ways to overcharge unsuspecting home buyers.
Sneaky Tricks of the Mortgage Trade
It is hard to guard against mortgage tricks if you can't
recognize them. Here are some of the most popular abuses, along
with strategies for dealing with them.
- Low-ball rates. Lenders may quote very
low rates initially, knowing full well that they cannot
provide the quoted rate. When you actually sign the deal,
they charge a higher rate explaining that "the market has
moved". This tactic is easy to spot. If the lender's
rate is much less than the best competitor,
the rate is too good to be true - a low-ball
rate. Run away.
- Surprise fees. Some fees are a surprise to
the home buyer because (a) they were never mentioned by the
broker, (b) they are unreasonably high, or (c) both.
Often, these fees come to light at closing, when
buyers have the least leverage to negotiate.
Solution: Insist that the lender provide a written list of
all fees that you will be expected to pay. And insist
that the list be provided early enough in the process so that
you can bail out if there is trickery.
- Unfair lock-in rate. There is often a
delay between the time that a borrower applies for a loan
and the time that the borrower actually decides to
During this time, interest rates may rise or fall, based on market conditions;
and the fee to lock in at a particular rate may also rise or fall.
If the market rate falls, your interest rate should fall and the lock-in fee
that you were originally quoted should also fall.
However, if a lower lock-in fee is warranted, an unscrupulous lender
will "forget" to pass that lower fee on to you.
Solution: Monitor mortgage rates and be sure that you get
the lower fee you deserve.
- Unfair float rate. This
trick is practiced on borrowers who let their rate float,
Here, the lender raises your rate
more than is warranted by market conditions and
lowers it less than is warranted by market conditions. This
trick is very effective, because it becomes evident just
before closing when it is too late to get
another loan. Solution: Get the
lender to agree in advance that on the day your rate is
fixed, it will be the same as the rate being offered
to new borrowers. Be sure to get this agreement in writing.
Sadly, that doesn't exhaust the list of tricky ways that
unscrupulous lenders can take advantage of unwary home
buyers. In his helpful book,
How to Save Thousands of Dollars on Your Home Mortgage,
Randy Johnson devotes an entire
chapter to how lenders cheat their customers.
More Ways to Guard Against Mortgage Tricks
Learning about mortgage tricks is an essential first step, but
there is more you should do. Here are two additional steps to
- Transparency. Work with lenders who
will tell you the loan's wholesale price (interest rate
and points), plus the markup. Get this info upfront and
in writing. This topic is covered in the lesson on
choosing a mortgage lender.
- Comparison shopping. Check current rates
online, and seek information from
more than one source. If you know the market, it will be
harder to trick you. This topic is covered in the lesson
finding mortgage information.
A Final Thought
You should not come away from this lesson thinking that all
brokers and lenders are cheats and liars. They are not. Most are
decent folks who want to help you get a mortgage.
At the same time, they are trying to make a
profit, for themselves or for their employer. By educating yourself,
you guard against the shady
few who would try to make an unfair profit at your expense.