Mortgage documents may hide problems in fine print

Extra fees and other problems could be in the fine print of your mortgage

Buying a house is expensive; it is probably the most expensive thing most people will buy. As such, most consumers want to spend at least a little bit of time shopping around for the best deal when they are looking for a home loan. Doing so can be quite complicated; there is more to know about a mortgage and its costs than just the interest rate. There are closing costs, taxes, points to buy down the interest rate and more. If you are not careful, there could even be some costs that you hadn’t counted on.

When you finally decide to go with a particular lender and a particular mortgage product, you should make sure that you read the document carefully. There are a number of things that can get hidden in your mortgage document that may make your expensive home even more expensive than you had anticipated.

Here are a few things you may wish to look out for in your mortgage document:

Prepayment penalties - They used to be fairly rare, but with the recent wave of refinancing in the last few years, more and more lenders are including these in their loan documents. In short, this clause provides a penalty, sometimes in the thousands of dollars, if you pay off your mortgage early or even make a “substantial” payment towards the principal prior to a date established in the contract. You don’t gain much from a prepayment penalty; it’s just there to hurt you should you decide to refinance later. If you don’t want one in your contract, discuss it with your lender ahead of time. It can’t hurt.

Negative amortization - If you find this in your document and you are surprised, it’s your own fault. Amortization is, in a nutshell, the paying off of a debt over time. That’s what you usually get if you take out a mortgage - you pay the monthly payment and the debt goes down. With negative amortization, your debt goes up over time! How does that happen? It happens when you take out a variable rate mortgage known as an Option ARM, which comes with four different payment choices each month. If you elect to pay the lowest amount, and many people do, you will find that it isn’t enough to cover even the interest that has accrued during the month. And if you haven’t paid enough, then the amount that you are short gets added to the principal. Yep, you can pay and still owe more than you did before you wrote the check. One would think that buyers would know ahead of time about such an arrangement, but many buyers meet with a lender and want to take out any loan that will help them buy the house. This one is risky.

The bottom line here is that you should always read the fine print of any legal contract that you sign before you sign it. In the case of something really expensive, such as a home, you should probably even take the extra step of hiring an attorney to look over the paperwork for you. Is that overkill? Probably not. The few hundred dollars you spend on a lawyer could save you thousands later. If you aren’t good at legalese, find someone who is.