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Transparency Of Mortgage Loan Terms
August 30th, 2007 categories: Mortgage Rate Watch, News on Interest Rates, Tampa Market Reports, Tampa Real Estate
The juxtaposed headlines in today’s Tampa Tribune’s business section:
Fed Urges Mortgage Options and Fewer Buyers Seeking Home Loans
In the first article the Fed chairman, Ben Bernanke , is quoted as saying that having “a broader range of mortgage products which are appropriate for low and moderate-income borrowers, including those seeking to re-finance” might help the current situation, and that said new mortgage products “could be designed to help avoid or mitigate the risk of prepayment shock and to be more transparent with respect to their terms”.
How do you make the terms of a mortgage more transparent? The fact is that many buyers/borrowers never fully understand what they are agreeing to when they sign the docs or what the agreed upon terms could mean down the road. Most just focus on the rate, the payment, and the closing costs. Once those three are acceptable it’s “where do I sign?”, “let’s get this thing over with!”.
Let’s face it, mortgage terms are difficult for most to understand, especially first time borrowers. Mr. Bernanke’s reference to “pre-payment shock” exemplifies this lack of understanding. Many borrowers recently took out these adjustable rate mortgages that are now adjusting, and not in the favor of the borrowers. And when they see how much the payment is going to be once the adjustment is made, the re-finance alarm goes off, and the call is made to see “what can I do?” It’s then that the borrower realizes that there is a substantial cost to get out of the current “product” in which they are in, the pre-payment penalty. Maybe they were aware of it, maybe not.
According to Craig Duncan with First Security Mortgage, one of our lender partners, an example pre-payment penalty is 6 months of interest if you pay off the loan within the first 2 years. That can be about $6500 assuming a $200k balance with today’s rates. The lender will often require the penalty so that they are guaranteed a certain return on the loan. The borrower usually gets a better rate. If you’re considering a pre-payment penalty, ask your lender if a “soft” pre-payment penalty is available. With this type, should you sell the property, no penalty would be due. A refinance however, would be penalized.
But the point here is that loan terms are transparent to the borrower. The borrower must sign the Truth In Lending form that discloses all of the terms, including any pre-payment penalties. Home buyers need to really think ahead when considering a pre-payment penalty. The terms are there. Just read and understand them. If you don’t, ask your Realtor or some other third party individual. And the best advice I can give is to work with a good team of real estate professionals that can give you the best guidance through all aspects of a home purchase. Realtor, lender, home inspector, etc. are all key elements in protecting buyers’ interests in a real estate transaction. Get a good team and use them to your advantage.
4 Responses to “Transparency Of Mortgage Loan Terms”
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Great article. If you don’t understand something, find someone that does. And if you aren’t willing to make the effort to take care of yourself - at least make sure that you have competent representation to do it for you.
Great article! How true about the difficulty in understanding the docs and even worse at a closing table. A lawyer who represented my client at a recent closing even had trouble with the terms of his clients mortgage docs! So I called the mortgage broker from the closing table!
You can’t expect all buyers to fully understand any of what they sign at closing. I just hate to see the mortgage brokers that take advantage of someone’s lack of understanding to put them in to something that will bite them in the a#@ at a later date! We know they’re out there.
[...] A few months ago I wrote about the transparency of mortgage loan terms after reading an article in which Ben Bernanke said that borrowers should have access to a broader range of mortgage products that “could be designed to help avoid or mitigate the risk of prepayment shock and to be more transparent with respect to their termsâ€. [...]