Find a Good Mortgage Loan

Unscrupulous lenders promise loans that are "too good to be true."   They often rush through any explanation of the details, they don’t encourage questions, and they pressure borrowers to make fast decisions.  Ask questions, and make sure you feel comfortable with the answers.

You should shop for a mortgage first with a mainstream bank or credit union.  

For almost everyone, the best option is a traditional, fixed-rate, thirty year mortgage.  Only take out another type of mortgage if you have a very good reason to.  If you do decide on another type of mortgage, be sure read our "Red Flags" below.

If you decide to take on an adjustable rate mortgage, figure out if you will be able to afford the monthly payments when the rate changes.  (Adjustable rate mortgages, or "ARMs," start out at one interest rate which will then change one or more times throughout the life of the loan.)  Also, find out when the rate will change.  How much will your payments be at the new rate?  Remember that you may not be able to sell or refinance your home before the rate changes, so you may be stuck with much higher payments.

• Shopping Tips

• "Red Flags" That May Indicate An Abusive Mortgage

• Questions to Ask if You’re Refinancing Your Home

Shopping Tips

• Nonprofit and Government Options:  Explore to see if you can get a mortgage from a local nonprofit or from the city or state government.  Local nonprofits and governments often offer programs for people who don’t normally quality for low-cost loans.  Some of these programs have income limits, or are only available for city employees.

• Homebuyer Classes:  We highly recommend taking a homebuyer counseling class from a certified nonprofit or governmental organization before buying a home.  Click here to find a HUD-certified housing counselor in your area.

• Comparison Shopping:  While it is imperative to shop around, the variety of options can quickly become confusing.  Use these three metrics to quickly compare mortgages, and keep in mind that fixed-rate mortgages are preferable:

  • The interest rate(s)

  • "Points" or origination fees

  • Other closing costs

• Escrow:  Your monthly mortgage payments should also include taxes and insurance payments.  Ask your lender about this.  If the payment doesn’t include taxes and insurance, factor these into your budget and make sure you can afford everything.

Red Flags

When shopping for a home loan, beware of these "red flags" that may indicate an abusive mortgage:

• High pressure sales tactics:  Don’t trust ads promising “No Credit? No Problem!”  Also, if your broker or lender discourages questions or asks you to leave any part of the application blank, you should walk away.

• "Exotic" loan products:  Beware of adjustable-rate mortgages or interest-only mortgages that have potential for steep payment increases, or that allow the loan balance to grow higher rather than lower (negative amortization).  Make sure your loan doesn’t have a huge "balloon" payment at the end, which you will have to either pay or finance.

• Excessive fees:  "Points" and fees are costs not directly reflected in the interest rates.  Because these costs can be paid by adding them to the mortgage loan amount, they are easy to disguise or downplay.  On competitive mortgage loans, fees below one percent of the loan amount are typical.  On predatory mortgage loans, fees totaling more than five percent are common.

• Abusive prepayment penalties:  A prepayment penalty requires you to pay a hefty fee if you decide to refinance or pay off a loan early.  A number of states have already banned or placed significant limits on prepayment penalties.

• Kickbacks to brokers (yield-spread premiums):  A "yield spread premium" is extra cash brokers receive from lenders for delivering loans with inflated interest rates (i.e., higher than the rate acceptable to the lender).  These kickbacks may explain why African-Americans and Latinos often get loans with higher interest rates compared to white borrowers with the same qualifications.

Questions to Ask if You’re Refinancing

Ask the following when refinancing a home loan.  Refinancing involves great potential for hidden costs, fees, security interests and other unfair loan term.

1. Is the new interest rate lower or higher than the current interest rate on your mortgage?

2. How much money are you getting out of the refinance in cash and in the payment on your mortgage and other bills?

3. If the loan is consolidating debt, or paying off unsecured debt such as credit cards bills or medical debt, do you want to use the equity in your home to pay these bills or is it a requirement of the lender?

4. Ask yourself:  Am I refinancing just because of pressure from debt collectors?  There may be other options than using the hard-earned equity in your home.

AFFIL is grateful to the Center for Responsible Lending for their help with this page.
Last update:  January 2009.