How Safe Is Your Mortgage?
If you have a mortgage now or are planning to get one, you might reasonably wonder, "Just how safe is my mortgage?" It's kind of an important question, since mortgages typically involve the roof over your head and represent money that's a significant portion of your net worth. Here's a review of a handful of ways that mortgages can be problematic and even unsafe.
Image source: Flickr user Pascal Willuhn.
Lenders might view your loan as unsafe
While you may be wondering about the safety of your mortgage, your lender is, too. After all, a mortgage involves a lender handing over a very large sum of money on your behalf. You're expected to pay off that loan, but that doesn't always happen. Thus, for conventional mortgages where the borrower puts down less than 20% of the purchase price, private mortgage insurance (PMI) is typically required. That insurance protects the lender, not you.
PMI won't make your mortgage any safer for you -- but it will make it more costly. You can request that it be stopped once your loan balance falls to 80% of the home's value, but until then you're facing steeper monthly costs, and potentially a higher interest rate as well. Some folks prefer to wait to buy a home until they can make a 20% down payment, in order to avoid PMI.
Your personal data can be at risk when securing a mortgage
When you apply for a mortgage, your lender will require gobs of personal data related to your income, assets, and credit, such as pay stubs, W-2 forms, tax returns, and bank statements. If this personal data isn't safeguarded, trouble can ensue. The information is necessary, as underwriters need to evaluate whether you will be able to make your mortgage payments and how likely it is that you'll do so.
But there are better and worse ways to get the lender the information. Many lenders let you upload documents and images into a secure portal. That's good. (Simply delivering the needed documents in person is good, too.) But many lenders will accept documents that you email to them as attachments -- and those potentially could be accessed by criminals. A few years ago the security specialist HALOCK Security Labs looked into the practices of 63 U.S. mortgage lenders and found that more than 70% of them allowed would-be borrowers to send required documents and images via unencrypted email attachments. Only 12% of them offered a secure email portal.
Meanwhile, the lender may sell some of your personal information to third parties, such as companies that want to sell you other financial products. By law, the lender must disclose how they treat your personal data and whether it will be shared with anyone.
Image source: Getty Images.
You take on a mortgage you shouldn't
This can happen in variety of ways. You might, for example, get a 30-year adjustable-rate mortgage (ARM) just before interest rates start skyrocketing, sending your payments soaring over several years. When interest rates are low, as they are now, fixed-rate loans are generally preferable -- unless you know you won't be staying in the home long.
Alternately, you might buy more house than you should, getting a loan with payments offering little room for error. A reduction in income could leave you unable to make your payments. For a safer mortgage, be sure you're borrowing wisely, in accord with your needs and ability to pay.
You can't make your mortgage payments
Even if you enter into a mortgage responsibly, the unexpected can happen and you may find yourself struggling to make your mortgage payments. If so, don't just ignore the problem. It could lead to your losing the home and wrecking your credit record in the process. Instead, let your lender know about the trouble, as you may be able to apply for some kind of mortgage assistance. Remember that your lender would also rather not have you default on the loan.
You can also consult a housing counselor. The U.S. Department of Housing and Urban Development can help with that, and the Consumer Financial Protection Bureau can help you find a counselor.
Your mortgage is sold
Mortgages are sometimes kept on the books of the original lenders for the entire decades-long lives of the loans. Often, however, a mortgage will be sold. This isn't generally a problem, though. If it happens, you'll be notified regarding what entity now owns your loan, and you should receive its contact information. Note that the servicing of your loan may stay with your original lender or it, too, might be sold.
In general, if you've taken on a mortgage from a reputable lender, it will be safe -- as long as you keep paying off the loan.
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