Consider these headlines:
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"More Homeowners Fall Behind in Payments" - San Francisco Chronicle, December 14, 2006
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"Mortgage Delinquencies a Rising Threat" - ABC News: Money, December 11, 2006
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"Foreclosures Spiked in August" - CNNMoney.com, September 15, 2006
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"Home Foreclosures Up as Mortgage Rates Climb" - ABC News: Money, May 10, 2006
Taking on a mortgage is probably the biggest money transaction you'll ever make. And if you're not careful, it could be the biggest mistake you ever make. So you've got to be careful -- really careful.
Unless maybe you happen to have a fairy godfather. The kind of fairy godfather who heads up a large family. And who happens to have has big, brawny pixie minions. The kind of pixie minions who your fairy godfather can send over to roughen up some people at your lender's place of business, if you happen to fall behind in your payments.
Then ... maybe you don't have to be so careful!
But for the rest of us -- the last thing you want to do is lose the home you are about to purchase as well as your good credit standing.
You can help protect yourself from financial trouble by learning some basic concepts about mortgages. Just a few key pieces of understanding will help you avoid the most common pitfalls in the home loan jungle. And since I'm not in the mortgage industry, I don't have an agenda that favors lenders. I'm a layperson, just like you, who has needed a mortgage for each home I've lived in. And I have three things I want to accomplish with this article:
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Help you stay out of financial trouble by sharing the knowledge I've gleaned through the years.
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Have a little humorous fun as I walk you around the pitfalls of getting a mortgage.
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Maybe make some cash from advertising.
So ... enough with the preliminaries already. Let's get rolling.
Getting Inside the Head of Your Loan Rep
Imagine if you could get inside the head of the person trying to sell you a loan. Depending on who your loan rep is, this could be pretty scary. But you could also see what motivates her; and you'd immediately understand if the loan she was offering you was a good deal.
One of the first things you would find is that the loan rep probably has several options he can offer you. Some will make him more money than others. And the typical loan rep will try to get you to spend as much money as possible. Isn't that what you'd do in his shoes? So no matter how good a loan sounds, you can be sure that if the loan rep is anxious to sell it to you, it's going to cost you money. And lots of it.
Now this isn't bad. It's just the way things are. And even if your loan rep ends up offering you a loan of "The Lesser Stratum" -- one that doesn't make your loan rep so much money -- that loan is still going to cost you a sizeable chunk of change.
So there are two things to keep in mind.
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The loan that sounds the best may not be the best loan for you.
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The loan that's best for you may be one your loan rep mentions second ... or third ... or never.
This, then, raises several questions:
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How do you figure out what makes a good loan for you?
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How do you figure out if your loan rep is doing an adequate job of looking out for your interests?
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When is it time to find someone else to help you?
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Does your loan rep have any good suggestions for cheap places to eat, now that you'll be signing your life away?
To help answer these questions (at least the first three), you need to understand what sets one loan apart from another. And for that, let's take a little journey into a parallel dimension -- the world of mortgage lending. That's the place where we can discover a little about how a loan company operates when it considers how to create different kinds of loans. That's the place where we enter -- The Twilight Zone.
Two Things a Mortgage Company Absolutely Will Not Do
There are two basic parts of a loan that a mortgage company considers when offering a loan product: profit and risk.
The profit part of a loan is pretty obvious -- the loan company is trying to make a profit by charging you money to use its money. A mortgage company is simply a cash rental company.
The risk part of a loan is a little more complex. The loan company takes a chance every time it loans money. There is always the chance that some event will occur that cuts into the profit that the company expected to make. For example, what if you refuse to make your mortgage payments? Or what if you can't afford to make them, because you lost your job? In those circumstances the mortgage company stands to make little or no profit from your loan. There are also other types of risk, some of which we'll discuss later. Even though you probably don't care about your mortgage company's risk -- your mortgage company most certainly does.
So the business of a mortgage company is to loan money by controlling its risk and maximizing its profits.
But there are two things a mortgage company will never do:
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It will not take chances that it thinks are too risky.
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It will not make a loan that offers too little profit.
