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 lock in. 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, rather than lock in. 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 consider.

• 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 on 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.