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By Gail Liberman and Alan Lavine PALM BEACH GARDENS, Fla. (MarketWatch) - As the real estate market slumps, sales pressure mounts for adjustable-rate mortgage borrowers to refinance into fixed-rate loans. Plus, ads for 1% and 1 3/8% teaser rates -- despite published reports of declining real estate prices -- are still around. "The bait and switch is stronger than ever," warns Michael Moskowitz, president of Equity Now, a New York mortgage banker. "Sales people are unscrupulous." Some of the mortgage refinancing offers are bad deals, and high pressure is coming from employees of some of the nation's largest lenders. At least one borrower we know was urged by a large bank-affiliated finance company to hurry and lock into a fixed rate. "You better meet me at my office on Friday," the rep threatened. "Rates are going to rise!" The deal, on the surface, seemed attractive. Due to a prior bankruptcy, this borrower's adjustable rate was more than 8%. Expecting that rate to rise in a few months, the borrower, by refinancing, would have seen the rate drop to the 6 to 7% range -- the average range for a good credit risk. However, this proposed deal would have increased the borrower's debt significantly. In addition, her existing mortgage had a prepayment penalty. The catches: Five points financed onto the loan and a host of fees added substantially more than $10,000 to the interest-accruing balance. Also, even though the borrower had made some payments on the mortgage already, the term on the new loan remained 30 years. What can you do if you're feeling squeezed by your adjustable-rate mortgage and fear rising interest rates and payments? First, make certain you can refinance. If property values have declined in your area, your home's appraisal could be short of what you'll need to qualify for a new loan. Even if you succeed in closing with an artificially inflated appraisal, you may be slammed by higher property taxes, warns Bill Brauch, director of the Iowa attorney general's consumer protection division. Plus, you could find yourself unable to get out of a bad loan. Also, determine whether your existing mortgage has a prepayment penalty and calculate its cost. Many of the popular payment "option mortgages" do have prepayment penalties. Check your credit report for errors substantially in advance of refinancing or getting a new mortgage. You're entitled to one free credit report from each of the three major credit bureaus annually. To qualify, go to www.annualcreditreport.com. Correct all errors. Once you close on a loan, its terms could be tough to change -- even if they're based on wrong information in your credit report. Beware of high-pressure refinancing pitches. Only believe promises of low rates and no prepaid closing costs if you have them in writing. Scrutinize points, fees and your resulting balance, compared with your existing balance. Determine whether the rate may change and how. Before you refinance, ask your current lender for a lower rate. Some lenders may refinance your loan to keep your business. You likely won't need to pay as many fees because the lender already has your records. Do business only with reputable lenders. Web sites to check for complaints against lenders include www.ripoffreport.com, www.complaints.com and www.consumeraffairs.com, as well as state regulatory agencies. Make sure the loan terms are fair. Lenders using a credit score to issue a mortgage or refinance for a one-to-four family home must disclose your credit score. Exceptions: If the loan is used for business, or if the lender buys a credit report with a credit score, but doesn't use it. Compare your interest rate with going rates, based on credit scores, at www.myfico.com. Already refinanced? You still might get a better rate. In certain refinances, you're entitled to rescind the loan for up to three business days after the latter of: consummation of the loan, delivery of the rescission notice or delivery of all material disclosures. If your lender fails to deliver required notices or material disclosures, you have up to three years to rescind the loan. Sophisticated borrowers are being wooed with a newer type of 30-year fixed-rate mortgage. This program has an interest-only payment option for the first 10 years. But a borrower paying just interest each month would see the payment, amortized over 20 years, balloon in year 11. |
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