Watch out for a new breed of mortgage lenders using telemarketing techniques. They offer to replace your current loan with something that sounds like a lower rate but is actually much more expensive when all is said and done.
What May Happen ...
A telemarketer will call and make an intriguing offer. For the cost of an appraisal, usually $300-$400.00, you can refinance your mortgage of let's say $160,000 @7.2% and get a fixed rate lower than what you are paying now.
The rate offered to you is usually less than 2 percent of what you are paying now.
Then the caller makes some quick calculations and tells you that the new loan will save you over $200-$300 PER MONTH. You will get just enough information to spark your curiosity. You listen on and then are asked for some basic details: address, birth dates, Social Security Number and a credit card number. (NEVER give out your social security number over the phone unless you actually know the person on the other end of the line. That is your life in a few short numbers.)
Several days later you will receive a package from the mortgage company. It will contain a proposal from the lender including details of your private credit files usually without even signing an authorization form. You will be offered the new low rate on " an equivalent interest rate" on a new mortgage balance higher than what you had to begin with. There will also be the words: "fixed interest rate mortgage" with "no out-of-pocket costs". You are also offered the possibility of a lower percent at the end of 3-5 years "provided that you maintain an "A" credit rating. What is an "A" credit rating? Find that out.
What is an equivalent interest rate? The interest rate appearing on the note may be 81/2% but the equivalent rate is 61/2% because of the way you will make your payments.
Built into the deal is an "interest rate buydown" from the lender. While the buydown may appear on the good faith estimate as some of the closing costs, it is NOT added onto the mortgage loan amount and you do not have to pay it at closing. The proposal says the buydown is a "5 year interest-free note.
The good faith estimate is attached listing the fees and charges you could expect. The closing cost alone could equal $12,000 including an origination fee, and a discount fee. The interest rate buydown will also be included. So what does this mean?
Your $160,000 mortgage debt at 7.2% is being refinanced to a 61/2% "equivalent rate - actually 81/2% on the note - in exchange for increasing your mortgage debt to $172,000. The lender will agree to encumber the $12,000 in "interest- free " buydown payments which they have already included in the mortgage payment. For this "lower rate" your payments will end up more than you are paying now. You will not be able to reach the telemarketer that originally called you. The lender does not return your call. The appraiser will arrive at your door unauthorized by you. And on and on.
So be wary: those aggressive lenders are marketing home refinancing to people who don't even need it, they are using confusing, ambiguous terms like "equivalent interest rate" to reel them in. |
