There are many problems with the mortgage industry, most are caused because loan officers know far more than the average borrower. Knowledge is your best defense against these mortgage scams and tricks.
This game is played by many industries including the mortgage industry. In the auto industry, they advertise a sports car in the paper but when you show up it suddenly turns into a Yugo.
Well lenders play the same game just a little differently; they advertise much lower rates than everyone else. It becomes a simple game of numbers to them.
They get 1000 people to call, 200 people to come into the office and 50-100 loans are completed and in reality if only 5 loans were made I'm sure that would cover their advertising cost.
This is a very profitable choice for some loan officers, no matter what they have to say or do.
Best way to avoid - Avoid any ads that are quoting interest rates 1/2 of a percent or more below the average interest rate.
A large percentage of loan officers like to tell you "oh of course I locked your loan", but in reality they choose to play the game and don't lock it. Many of these loan officers are not trying to cheat you; they're just rolling the dice on their profit margins.
If they tell you it's locked and then choose to let the interest rate float, they are hoping the interest rate will move down further before the loan closes.
This improves their profit on the loan without costing you any additional upfront cost. The lender ends up having to pay them a bigger YSP on the backend of the loan.
If the interest rate goes up, it usually does not move so fast that a loan officer would not be able to lock the loan before his profit was erased. There are times when they can not lock it fast enough. They will then either pass the cost onto the borrower with some story as to why their rate was not locked or, (if they're worth a darn) they'll simply eat the difference and hope to make it back on a future loan.
Best way to avoid - Have the loan officer give you a copy of the rate lock sheet provided to him by the lender, also have him sign and date it for you. If he refuses, or says he's not allowed to do that, hit the door and find a new loan officer/broker.
You have no cost loans, and you have "no-upfront-cost" loans. A true "no-cost" loan will have an APR equal to the interest rate.
A "no-upfront-cost" loan will bury the fees in the loan, having an APR which is significantly higher than the interest rate. There are loan officers that don't know the difference then there are others that know, but try to cheat you anyway.
Best way to avoid - Check the Annual Percentage Rate
This is one of the worst tricks a loan officer can use. By not disclosing the prepayment to the borrower the loan officer is getting a much larger yield spread premium then he would without it. Most borrowers will not find this out for perhaps years. Then it will end up costing you thousands or tens of thousands to get out of the prepayment fee.
Best ways to avoid - Always ask your loan officer if the loan has a prepayment penalty and have him show you in the documents (i.e. good faith estimate, truth in lending or other disclosure). You also need to ask the title officer or notary when you sign the final documents during closing.