Let the borrower beware when getting mortgage

By HOLDEN LEWIS
BANKRATE.COM

Whether you already have a mortgage or you plan to buy a house in the next year, here are seven mortgage tips for 2007.

# Review your mortgage -- does it still fit your circumstances? Interest rates change, children are born and grow up, sometimes you need to fix up the house and sometimes you need to move on. Life events can trigger changes in the way you pay for your house.

"Every year," says Dan Hanson, who oversees the retail branches for Countrywide Home Loans, "say, 'What's going to happen this year? Do I have a child who, in a year, is going to college? Are we going to have a child, maybe add a bedroom or have to move?' " The answer might make you go mortgage shopping.

Hanson believes that you should ask yourself periodically: "Is my interest rate higher than the market today? Would it make sense to refinance, to take cash out? Would it be a good idea to get a reverse mortgage? How much is my house worth?"

# Watch out for reset. Have you ever seen a cartoon where Bugs Bunny stands at the base of a cliff and he yells at someone standing on the cliff's edge, "Watch that foist step. It's a doozy!" Same thing with a lot of adjustable-rate mortgages: The first step is a doozy -- but up instead of down.

The rate adjustment is called the "reset," and on hybrids such as 3/1 and 5/1 ARMs, the rate can jump as much as 5 percentage points. More realistically, a lot of borrowers face jumps of 3 percent to 3.5 percent in 2007. For interest-only borrowers, that might mean a doubling of the monthly payment.

Don't get caught by surprise by a rate reset. Refinance if necessary.

# Don't pay the minimum on an option ARM. An option ARM is an adjustable-rate mortgage that lets you decide how much you pay each month. The minimum payment doesn't necessarily even cover that month's interest. "You don't want to end up owing more than what you started out with," says Jim Bradley, owner of American Residential Lending Corp., a mortgage brokerage in Atlanta.

# When you get a mortgage, shop around. If you're smart, you'll start your mortgage search by looking at Bankrate.com's mortgage rate tables. Don't stop there, says Steve Habetz, owner of Threshold Mortgage in Westport, Conn. "First, shop the Internet for rates, but look for a local lender to apply for your loan," he says. If you have questions or problems, either before or after getting the loan, "you can get in your car and meet someone to talk to."

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# Make an extra payment. If you make 13 mortgage payments every year, you will pay off a 30-year, fixed-rate mortgage in less than 25 years. Many online mortgage calculators let you find out how extra payments affect your payoff date, whether you make them monthly, annually or just once.

# Think about getting mortgage insurance instead of a piggyback loan. If you buy a house in 2007, and you make a down payment of less than 20 percent, you'll either have to buy mortgage insurance or get a piggyback loan -- a primary mortgage for 80 percent of the home's value and a second mortgage for the rest that you owe.

For a long time, piggyback loans were almost always a better deal because the interest on both loans was tax-deductible and mortgage insurance wasn't deductible. But that changed with the 109th Congress, when both houses passed a tax law. For loans originated in 2007, the mortgage insurance premiums will be deductible from federal income tax.

# Be skeptical. "If it sounds too good to be true, it probably is," Habetz says. He sees plenty of customers who got mortgages (usually option ARMs) at 1.25 percent from other lenders. Then the borrowers are surprised when the rates start rising abruptly just a year later. "Now they find out there is no such thing as one-and-a-quarter percent, they're facing huge prepayment penalties to get out of these loans or they're facing a rate that's well above the market at this point," Habetz says.

Mortgage fraud an 'absolute epidemic,' conference told

Canada is becoming a global trendsetter in mortgage fraud, a crime and risk management expert told an anti-fraud conference that opened in Toronto on Tuesday.

Chris Mathers, told the conference that real estate fraud is the newest form of identity theft.

"[Mortgage fraud] is an absolute epidemic, a huge problem in the developed countries, especially here in Canada," said Chris Mathers, a specialist speaking at the International Fraud Investigators Conference in Toronto. "And I don't see it changing anytime soon."

Mathers said while credit card and mass marketing scams are still a large concern, the potential for real estate fraud is enormous. A bill before the Ontario legislature would raise the maximum penalty for real estate fraud from $1,000 to $50,000.

Earlier in the day, Ontario's information and privacy commissioner warned holiday shoppers to be particularly vigilant this holiday shopping season.

"You have to guard your personal information in all forms at all places," Ann Cavoukian told CBC.

"This extends from keeping your wallet and purse protected to not carrying very sensitive documents like your social insurance number … you don't need to carry that around with you. That's the golden key that will unlock so many databases and get bad guys in to compile a personal profile and access your information."

A separate web card

Cavoukian, who will also be speaking at the conference, said consumers should apply for a separate credit card to be used exclusively for online purchases. This card should be restricted with the lowest credit limit possible.

"You can separate your online purchase from your regular credit card where you may have pre-authorized payments and a lot of activity, and if anything happens online and your card is compromised, you can very easily separate the harm from that from your regular life," she said.

The privacy commissioner also said consumers should check websites for a secure padlock symbol, shred private documents, and make sure their computers and personal data assistants, such as BlackBerries, are password protected. Identity theft, she said, has reached surprising new heights.

"There's a whole group of people they're called dumpster divers, that's what they do for a living," she said. "They go through people's garbage and especially they go through the big garbage bins of businesses like car rental agencies where you can imagine the forms you fill out are full of sensitive information. If they just throw it out, these guys have got gold."

Cavoukian said whenever she fills out a form, she asks the company to shred the information once they are finished with the document.

The privacy commissioner also called on businesses to tighten their security restrictions, noting that many businesses allow large numbers of their employees to have open access to sensitive information.

"A rogue employee has access to identifiable information with your name and address and other information associated with you and they sell it. They sell it to the highest bidder," she said.

"Organized crime is getting into identity theft big-time because it's so easy to do."

CBC News

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About The Author:

The author is a business writer specializing in finance and credit products and has written authoritative articles on the finance industry. He has done his masters in Business Administration and is currently assisting Loans-Bazaar as a finance specialist.

For more information please visit: http://www.loans-bazaar.co.uk