Whether you are getting a first mortgage on your house, refinancing an old loan for better rates or terms, or taking out a home-equity line of credit, there are several traps that you can fall into if you aren't careful.
Especially now that the economy has done so badly for the last few years because of this major recession we are in that has lasted from 2008 all the way up to 2010, banks have been less apt to loan money and when they do they may be more strict about how they do it.
This translates into several traps that you can fall into that may make your loan more expensive than it should be. But if you know about these things before hand then you can confront your bank about them and threatened to go to a different bank if they don't remove them which is why I wanted to write this article for you today.
I'm pretty sure that everybody is aware of the variable interest rate trap where a bank tries to give you a variable rate that can go up or down every year depending on a set of criteria that the bank defines. In times of falling interest rates these are good for you because your interest rate can go down; but interest rates right now are at all-time historical lows, meaning they have nowhere to go but up so it's a very bad idea to get a variable interest rate loan right now.
I'm also probably sure that everyone's aware of the trick that banks use to try and get you to sign a 20 year loan instead of a 30 year loan. Yes by definition you'll pay off a 20 year loan quicker, ten years quicker to be exact! And yes it's true that you'll pay less interest... but the fact remains the same that a 20 year loan will give you a much higher monthly payment than a 30 year loan will and especially for people who are refinancing in order to lower their payments this is an especially important fact to consider.
But in this article I wanted to discuss one of the less known traps that you can fall into. I'm talking about balloons. Many borrowers have never even heard of what a balloon is. But they can be especially common in refinances and second mortgages. Basically a balloon is a balloon payment. It gives you a very low interest rate for a period of time, say five years. But then after that period of time the entire amount of the loan becomes due all at once.
In the old days this was attractive because you could take advantage of low interest and low payments for those first five years and then when it came time for the entire alone to be due on the fifth year you could simply go out and get a new loan and used the proceeds from it to pay off the old loan. The problem is, with the recession it's harder to get new loans than it's ever been so you may not be able to refinance in five years and then you'll be stuck paying the entire amount of your loan all at once which can be devastating for most people.
So there you have three common and not so common traps to look out for when it comes to getting a mortgage. Hopefully now you have the information you need to get the best deal possible so that you pay the least amount of money for your loan.
