Many people think that the cheapest mortgage is the best mortgage, but the reality is that the right mortgage is the best mortgage. Getting the cheapest thirty year fixed rate loan is going to cost you a lot more money if a thirty year fixed rate loan is not the right loan for you. Shopping for the cheapest mortgage has exposed many potential home owners to predatory lending practices. What exactly is predatory lending? Predatory lending is a practice where lenders try to fool you or even bully you into taking out a loan that’s really unaffordable or not in your best interest.

These lenders are simply seeking to make a profit and unfortunately it’s at your expense. Predatory lending has been receiving national attention due to the current economic conditions in the real estate industry. It is estimated that as of this approximately $9.1 billion per year has been lost to predatory lending. These lending practices typically take advantage of the elderly, minorities, and people with credit issues. Another ugly side of predatory lending is outright fraud, where documents are signed for borrowers without their knowledge. Borrowers have discovered that something was signed for them, and they had no clue. They never knew about it. Online lending has been a significant source of predatory practices. Buyers go online to find the cheapest rate.

After finding the desired low rate at a lending website they are promised a certain rate and loan type, only to find out the truth when they get to closing. You start out with one rate and one type of loan, for example, maybe you may be offered a six percent interest rate. You get to closing and you find that it’s six and a half percent, seven percent, or maybe higher. You’re looking at a thirty year fixed, but you end up with an adjustable. Some predatory lenders may advertise that they have no fee loans. However they engage in an underhanded game of semantics by calling the fees charges or burying them in other aspects of the loans. You may also be told that there will be no closing costs but when it’s time to close you end up paying costs. To avoid these practices, it’s important to always obtain a good faith estimate in writing, and ask questions about everything.

Good faith estimates should break down everything you will be expected to pay. You want to be careful and go item by item over any good faith estimate with any loan officer, mortgage company, or planner. Unfortunately, many people spend more time planning a vacation than researching a mortgage. Your mortgage is usually the single largest transaction of your life, and should be given more attention than thirty seconds on a phone call just to get a price. Finding out the rate over the phone or the internet does not begin to cover the amount of information you need to find the best mortgage for you.

Now, another game played with predatory lending is pre-payment penalties. A prepayment penalty is an additional fee if you pay the loan off early. An early pay off would include refinancing as you are paying off your existing loan and taking out a new one. Predatory lenders will typically not disclose pre-payment penalties and borrowers find out when they are looking to pay the loan off soon. In recent years this has become a significant problem. Many borrowers tried to refinance out of adjustable rate mortgages at the end of their introductory rate period. These borrowers discovered that there was a prepayment penalty.

The penalty combined with the decline in housing prices made a refinance impossible because they could not qualify for a loan large enough to cover their payoff and penalties in a soft market. Prepayment penalties are not an unscrupulous practice on its own. Now, if you don’t know about it, and you find out at your next refinance or your next closing, that’s predatory lending. Pre payment penalties may be more than a year.

For example, in New York by state law, you can only have a one year prepayment penalty on a fixed rate mortgage. On an adjustable rate mortgage, it has to be a $250,000 mortgage or greater to have a one year prepayment penalty but federal chartered savings banks don’t fall under New York State law. So, they can charge a prepay penalty of anything they want. So, if your broker, or your lender, happens to be working with a federally chartered bank, you may be subject to a three year or five year prepayment penalty, and you don’t even know about it.