One of the rituals of buying a house or refinancing a mortgage is signing a stack of paperwork. The time it takes to slog through these documents can seem interminable, but can you imagine how time-consuming the process would be if you actually read the stuff you were signing?
My husband and I are as guilty as probably the rest of you. In the past, when a notary has shoved papers across our dining room table, we've pretty much been focused on making sure we signed and initialed everything. We have always relied upon the efficient paper pusher to supply us with pens and a blur of an explanation about each document. We could have been initialing clemency papers or signing away the rights to our home with an iffy roof, a balky garden and a bathroom with orange tiles that my husband loathes.
I have always felt vaguely uneasy about blowing off our responsibility. And yet, nothing bad has ever seemed to happen when we've refinanced to capture lower interest rates. We haven't encountered any problems as we've chipped away at our current 15-year fixed-rate mortgage. So what's the harm?
Actually, our inattention could be costing us an obscene amount of money. If you daydream through the loan process - from the first conversation with a lender or mortgage broker to the last signature - you may end up paying far more over the course of your mortgage than you could imagine. When homeowners are distracted, it's amazing the sort of booby traps that can remain undetected within 50 cents worth of legal-sized paper.
Whether you're refinancing or obtaining a new loan, what's critically important is understanding what the loan's costs are and, even more basic, what type of loan it is. If you don't remain alert, you could get skewered, breaded and deep-fried by a master chef of the double cross.
That's what happened to one unfortunate borrower in San Diego, who was quite adamant when he told a mortgage broker what he desired. The man wanted the lowest monthly payments possible on a $400,000 loan because he intended to flip the house and pay off the mortgage within a year.
Months after the paperwork was processed, he discovered that his loan had fangs. His broker had hooked him up with a negatively amortized loan that would charge 3 percent of the loan's value as a penalty if he abandoned it before 36 months had expired.
It was only after the borrower sought help from John M. Smith, a mortgage broker at Old Mission Mortgage in San Diego, that he learned that the original guy had collected a $16,000 commission. The client had directly paid him a point, or 1 percent, of the loan amount, but he didn't realize that the bank had paid the broker another 3 percent. The compensation, Smith observed, was "egregious and beyond the pale."