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Jack M. Guttentag The Mortgage Professor

Jack M. Guttentag, The Mortgage Professor

Some Answers to Frequently Asked Mortgage Questions

by Jack M. Guttentag

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Posted on Wednesday, June 4, 2008, 12:00AM

Below are answers to some of the most common questions I am asked by readers.

Does mortgage insurance protect me if I'm disabled or lose my job?

No, mortgage insurance protects the lender against loss in the event that you default. You pay the premium, but the lender receives the protection.

The sole benefit to you is that, with mortgage insurance, lenders are willing to make loans with down payments smaller than 20 percent of the purchase price or appraised value. I should add that a few mortgage insurers have experimented with programs that provide the kind of protection to borrowers that you are asking about, but they have never caught on.

What is the best type of loan to take if I know I will be paying it off within two years?

When your time horizon is very short, you want to minimize your upfront cost. The best way to do this is with a no-cost three-year or five-year adjustable-rate mortgage (ARM).

A no-cost loan is one with an interest rate high enough to command a rebate from the lender (negative points) that will cover your settlement costs. Avoid interest-only or option ARMs because these minimize your payments rather than your upfront cost.

How can I know whether a mortgage broker or loan officer is a predator?

You can't; there is no directory of predatory loan providers. Checking the Better Business Bureau or the state licensing agency is usually a waste of time, because very few misdeeds are reported and predators change their names and locations.

But this question is only posed by borrowers who have allowed themselves to be solicited, which is a big mistake. Select your loan provider, don't be selected. If you were a wild-mushroom fancier who lived in the woods, which are full of mushrooms, and a mushroom knocked on your door and said "eat me", you wouldn't, because it might be poisonous. What the mushroom fancier does is choose from among those he knows are safe, ignoring the rest. You should select a loan provider that way.

If I refinance two years after purchase, why do I need a new title insurance policy?

You don't, but the lender will probably require a policy that protects him against the risk that some liens might have been placed on your property during the two years since the policy was written. Title insurance policies are backward looking; they cover incidents prior to the date of the policy. Anything that happens after that date is not covered.

If only a few years have elapsed since the previous policy, however, you are entitled to a discount, because the insurer doesn't have to do a lot of work to bring the policy up to date. Be sure you ask for the discount; if you don't, you may not get it.

Am I in trouble because I borrowed as an occupant, then changed my mind and rented the property?

Lying on your application is a fraud, but everyone is entitled to change their mind. If you occupy the house for a while and then rent it, you are probably in the clear. If you never occupy it, appearances are against you, but if you make all your payments on time, nobody is going to care, and the chances are that nothing will happen. If you never occupy the property and become a chronic delinquent, a flag goes up opposite your name, an investigation could reveal your transgression, and an action might be taken against you.

What is the major risk in buying a home under a lease-purchase contract?

The option to purchase a house under a lease-purchase contract is contingent on the buyer paying the agreed-upon rent every month. If the buyer doesn't pay, the seller doesn't have to sell. But the devil is in the details.

A contract that allows the seller to back out if the buyer is late only once, by a single day, is clearly unfair. The buyer should read the contract carefully to make sure that this provision is not unreasonably onerous.

What should I do if the lender mistakenly raises my tax escrow payment?

Pay it, and then make your own calculation of what the escrow should be and submit a "Qualified Written Request" under the Real Estate Settlement Procedures Act to get your money back. 

The worst thing you can do is refuse to pay, because the lender will place your insufficient payment in a suspense account, which means you are delinquent and on your way to having your credit ruined.

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42 Comments

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  • Yahoo! Finance User - Sunday, June 15, 2008, 10:37AM ET  Report Abuse

    • Overall: 4/5

    Great advice. Funny seeing someone go bonkers over what he/she terms as the Professor being "in bed with the big banks." I bet you are a lender aren't you?LMAO

  • Yahoo! Finance User - Saturday, June 14, 2008, 8:26PM ET  Report Abuse

    • Overall: 5/5

    Well, it's true, ARMs can go down. I couldn't believe it either. My ARM with (now) Wells Fargo went down from 4.5% to 4.27% beginning July for the next year. S.

  • Yahoo! Finance User - Friday, June 13, 2008, 12:57PM ET  Report Abuse

    • Overall: 1/5

    The professor is NOT always right, he is in bed with the big banks that want get rid of mortgage brokers all together. He wants things like they were in the good ole days where you went to your local bank and had to put your tail between your legs and show a big banker why you were worthy enough to buy a home. This guy is nothing but a kiss @ss salesaman who will do anything for a buck. He believes in discriminating against mortgage brokers and leaving the rest of the originators alone. This article is a weak attempt to push his worthless book and website. PERIOD.

  • BJ9736 - Friday, June 13, 2008, 8:26AM ET  Report Abuse

    • Overall: 4/5

    What mortgage crisis?!? Of all the people I know, not one of them has experienced a foreclosure. This is only a crisis for the fools.

  • Yahoo! Finance User - Thursday, June 12, 2008, 4:23PM ET  Report Abuse

    • Overall: 1/5

    To tjolley2000- How much does a 5/1 or 3/1 ARM save on the rate. It looks to me like around 0.5- 0.7% at present. Throwing away money? Look at the increased fees and closing costs for the ARM and write back. I think that you'll find the initial APR to be significantly higher. Besides, I've never heard of the rate going down on an ARM. To Ice: I doubt that you'll find somebody using an ARM that had a lot of equity. Most of the time, people have only used this as a tool to get into a cheaper house payment because they couldn't afford a standard rate at that time and it was a viable alternative for the short-term. The only problem is that their income didn't increase as fast as their expenses. Don't you watch the news, read the paper, or look on line to see how these people are complaining that they're losing the house because their payment significantly increased on their ARM? Duh! (Dude?, Duddette?, Jabron???? Obviously, you couldn't be taken seriously in a debate with your limited language skills.)

  • Yahoo! Finance User - Thursday, June 12, 2008, 3:50PM ET  Report Abuse

    • Overall: 2/5

    Some substance exists in this article but I don't agree with the people that still think that an ARM is a good idea for a purchase. If you're only going to be in one spot for 2 years, why not rent rather than pay all of the closing costs and other costs of ownership? Could you even realize enough appreciation to cover the real estate fees? The market would certainly say that is not the case. If you're going to stay longer than 2 years, buy what you can really afford. If you plan on paying off a mortgage completely in 2 years, generally the payment is adjusted for large chunks being paid-off ahead of schedule and the realized rate would be much lower regardless of the type of mortgage. Basically, take the mortgage with the lowest fees. Personally, I can't see why anyone would pay off a mortgage early since it would be poor leverage of investment. The tax advantage should be taken into consideration and the market investment opportunity. If your income is high enough that you don't see a tax advantage, I guess any mortgage at all is well off of the radar. Every single person that I know that has an ARM or interest-only loan is the same type of retard wannabe that leases a car that they can't really afford every 2 years and has maxed-out credit cards. Look at the people who are in the middle of the forclosure mess. They all have the same old story about how some mortgage broker "duped" them into an ARM when they thought they were getting a fixed rate. I only need to read the WSJ to see what people are saying about 6 figure salaries and only $54 in the bank because they need "help" in paying off their credit cards. You only need to look at the county auditor's website to examine the real estate records to see the ARM paperwork attached to the forclosed home since the records are, after all, public. Wake up and smell the BS! Mortgage lenders are in the business of making money. Creative financing isn't a favor because the bank likes you. There is a financial advantage to the creativity or they wouldn't be doing it.

  • TomJ - Thursday, June 12, 2008, 12:53PM ET  Report Abuse

    • Overall: 3/5

    My comment is for the intelligent person that said no one should ever get an ARM. Do you also recommend that no one ever buy a Philips head screw driver... Sounds to me you could use one, as you seem to have a few loose screws upstairs. You have to use the right tool for the right just, and a mortgage is nothing more or less than a tool. Everyone is not in the same shiny plastic cookie cutter boat, and paying extra to insure that your rate will not change in the next 30 years doesn’t always make sense. If you want to throw away your money just to be coddled and have a warm fuzzy feeling, that’s your choice. But what does all the extra money you spend on interest buy you?

  • Ice - Thursday, June 12, 2008, 12:45PM ET  Report Abuse

    • Overall: 4/5

    To the dude or dudette that posted 6/12 @ 12:10pm.............. Get a clue, Jabroni! If you are going to pay off your house in 2 years, a 3-5 year ARM is the best approach. Obviously, that person has lots of equity already and I would suspect is pretty liquid with a 2 year time horizon.

  • Yahoo! Finance User - Thursday, June 12, 2008, 12:10PM ET  Report Abuse

    • Overall: 1/5

    This article is complete drivel. I can't believe that anyone is still recommending an ARM under any conditions!. The entire idea that people can accurately predict an improved financial condition or a change in residence 2 years from now is precisely what got a good portion of borrowers in trouble during the present mortgage "crisis". I don't care what anybody else says, an ARM should be considered a sub-prime loan condition. Why would anyone consider a lease-purchase contract? If a buyer needs to lease, they are a bad credit risk or blowing smoke about buying the house. If they can't get a loan to buy or if they're short on the downpayment, pass on the deal. Don't be a dope. Predatory mortgage brokers? They're all predatory! Why would anybody pay the broker's premium fees when there are so many reputable mortgage lenders around with low costs. Broker's commission? Hardly- I'm not stupid. For crying out loud, you can surf the internet for a half-hour and get a better deal than any broker if your credit is decent. How about a phone call to the lender if they mistakenly raise your escrow payment? It's worked for me every time with one exception. About 15 years ago, Norwest Mortgage (who bought the paper, by the way- I did not finance through them originally) wouldn't fix my payment with any type of call or filing. I refinanced with the biggest (and best) mortgage lender in Ohio, Third Federal Savings and Loan, and everything has been perfect since. Since they always service the mortgage regardless of who holds the paper, there is NEVER any trouble in getting something fixed. They'll even spread any escrow shortage over the next year rather than demanding an up-front payment. Use your head, pay your bills on time, don't rack-up your credit card debt and it won't be an issue to get a good loan.

  • Yahoo! Finance User - Wednesday, June 11, 2008, 11:20PM ET  Report Abuse

    • Overall: 5/5

    The Professor is always right. To the person that asked why 70-90% of their payment goes to interest in the first 10 years, the reason is because the mortgage interest is 5-8% per year, not per 30 years. If the loan were paid off in one year, then only 5-8% goes to interest.

  • Brussels - Wednesday, June 11, 2008, 10:02PM ET  Report Abuse

    • Overall: 5/5

    Solid, no-nonsense advice.

  • Yahoo! Finance User - Wednesday, June 11, 2008, 6:12PM ET  Report Abuse

    • Overall: 5/5

    Yahoo should disable comments because most comments are typically ill-informed idiots. Unlike myself, who is a genius. Jack is a good guy who tells the truth and is always worth reading. The dopes who disparage him are the fools who either got in at any price and who now want us to believe that they were "taken advantage of" or the ones who have predicted the current downturn 10-times over. Jack should take it a compliment when he gets one-star ratings because its a sign he's doing something right. When babies get frustrated they cry and hit out.

  • hunter - Wednesday, June 11, 2008, 5:13PM ET  Report Abuse

    • Overall: 1/5

    mortgage insurance, at what cost, what percentage of the home's value? another scam to protect the lender and to hell with the borrower.....borrower fleeced out of more money...if you can't get a loan without having to buy mortgage insurance, screw the lender.....find another lender or buy a cheaper property.....this is just another cost a qualified borrower should NOT have to pay.....

  • bp - Wednesday, June 11, 2008, 4:09PM ET  Report Abuse

    • Overall: 1/5

    Yahoo really needs to have an expert in the industry take over for this quack. To call him the "Mortgage Professor" just adds to the ridiculousness in the industry. A "No-Cost" mortgage is certainly paid for with a higher rate, he is correct there. (NOTE: If a lender tells you different...go to a different, honest lender.) However, due to the rebate (correct term for the industry...I was surprised that he knew it!) pricing, short term arms have to be raised dramatically to have enough rebate to pay the third-party fees. Not to mention, that low loan amounts may not even be feasible for this scenario, as the rebate is a percentage of the loan and many costs are not based on a percentage. (eg. appraisal and escrow) This could mean that your rate would be higher on an ARM than on a 30 year fixed rate loan if you are looking for a "No Cost" loan. That would make NO sense to do. Please, Jack, stop giving out the bad advice. You are making the industry look worse than it already does.

  • Nick Name - Wednesday, June 11, 2008, 3:39PM ET  Report Abuse

    • Overall: 3/5

    Not bad but the most important question would be "How much house can I afford" the answer should be "Whatever the lender tells you then chop 25% off of that". To give yourself a margin of error against rising prices or income issues. The last 2 questions as someone pointed out are rather obscure - how many people really ask those?? As for escrow, my lender seems to be padding it like crazy. Though its convenient to let the lender take care of tax/insurance payments Im going to tell them to cut way back on the amount in escrow to more closely match actual payouts.

  • Yahoo! Finance User - Wednesday, June 11, 2008, 3:13PM ET  Report Abuse

    • Overall: 1/5

    Without a proper overview of the economy in general (toilet), it's difficult to make large economic decisions relating to home ownership. For me, home ownership came as a family gift. Free and clear. Take care.

  • Irving - Wednesday, June 11, 2008, 2:56PM ET  Report Abuse

    • Overall: 4/5

    Solid information. It's a little hard for me to believe the last 2 are most commonly asked questions, but the last question could be applied to many issues--I have a small business and was advised I was delinquent with a DE-6 or EEC payment (I knew I wasn't). I paid it, with an enclosed note--and believe or don't, I got the money back. Unless it's a large amount, go ahead any pay these types of bills (under protest) or you will trigger something you don't want any part of.

  • yo - Wednesday, June 11, 2008, 2:51PM ET  Report Abuse

    • Overall: 1/5

    As a first time home buyer those questions should be known before any investment....How is "What is the best type of loan to take if i know i will be paying it off within two years?" a frequently asked question? Also, his "Find a Loan Provider" is trash!! Just another way for this guy to make money.

  • Jason - Wednesday, June 11, 2008, 2:38PM ET  Report Abuse

    • Overall: 2/5

    subprime loans, and prime loans.... interest only arms, option ARM's, 2/28's, all adjust UP, because they had initial teaser rates that are way lower than any real interest rate. So, unless the fed cut's rates to negative, the rates on these funky ARM's will adjust upwards.

  • Yahoo! Finance User - Wednesday, June 11, 2008, 2:19PM ET  Report Abuse

    • Overall: 1/5

    Well, it could have been worse. It could have been Greenspan on Feb 23, 2004, telling everyone at a Credit Union speech in Washington DC., that fixed rate loans were very expensive and that adjustable rate mortgages were definitely the way to go. It's hard to imagine anyone, except possibly another economist, buying such abnormally unintelligent advice. Or it could have been another Ben Stein article on "How to time the market" with his bizarre 15 year P/E moving average. The obvious problem with this nonsense is that, weighted or not, the P/E is a simple summation process. So if just one company has an E of zero then P/E is undefined since division by zero is itself undefined.

  • Yahoo! Finance User - Wednesday, June 11, 2008, 2:15PM ET  Report Abuse

    • Overall: 5/5

    the question is why all subprime mortgages do not adjust down considering the recent interest rate cuts?.....sounds fishy to me

  • ALLISON - Wednesday, June 11, 2008, 1:50PM ET  Report Abuse

    • Overall: 2/5

    There is some substantive info in this article, but I smell a sales job when it comes to the predatory lender issue. In my experience as a mortgage broker, banks seem to be the worst offenders of predatory lending. They are not required to report the yield spread premium (aka commission) on the HUD statement at closing. Yield spread is directly connected to the rate of interest you receive on the loan. And consumer beware of "no closing costs" advertising. You do pay because the bank or broker raises the yield spread to pay for what they say is "free". This industry is becoming more regulated because of greed. So ask questions and hook up with a mortgage broker who educates. Some of us are professionals.

  • Yahoo! Finance User - Wednesday, June 11, 2008, 1:40PM ET  Report Abuse

    • Overall: 1/5

    Shameless advertisement 99% .5% jibberish .5%an absolute waste of anyone's day to read

  • Heroine Worshipper - Wednesday, June 11, 2008, 1:32PM ET  Report Abuse

    • Overall: 5/5

    My mortgage insurance is Barack Ubama. Bring on those entitlements.

  • GlennS - Wednesday, June 11, 2008, 1:26PM ET  Report Abuse

    • Overall: 1/5

    The good info he provides is discounted because of his self promotion of his website which, as another person alreadystated, is a joke as anyone with cash can be added to his "loan provider" list

  • Yahoo! Finance User - Wednesday, June 11, 2008, 1:06PM ET  Report Abuse

    • Overall: 4/5

    While this info info might seem like mortgage 101 stuff, there are obviously many people who need this considering the sub-prime debacle we are in the midst of.

  • Yahoo! Finance User - Wednesday, June 11, 2008, 1:05PM ET  Report Abuse

    • Overall: 2/5

    It's always fun when the Yahoo! Finance experts go to the "mailbag".

  • JoeS - Wednesday, June 11, 2008, 12:44PM ET  Report Abuse

    • Overall: 1/5

    Seriously this is just an advertisement for this guy's website. His anology about finding a mortgage company is just stupid. Wild mushrooms knocking on your door what??? I went on the website and looked at his lenders and they are just companies who paid to advertise with him. This article is a joke! Anyone who writes an article purely to promote his lending website should be removed as an expert.

  • Yahoo! Finance User - Wednesday, June 11, 2008, 11:59AM ET  Report Abuse

    • Overall: 1/5

    Is this a solicitation just for his website? I do not see any value to a consumer here?

  • Yahoo! Finance User - Wednesday, June 11, 2008, 11:56AM ET  Report Abuse

    • Overall: 1/5

    this guy is a wild mushroom

Showing comments 6-35 of 42<< PreviousNext >>

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