- 1. "Our bonuses are really kickbacks."
-
- Michael Moskowitz doesn't mince words. "It's the
mother of all potential snookering," says the president of New York-based
mortgage lender Equity Now, "and it's a game being played on even
the most sophisticated consumers." The name of the game is yield spread
premiums - and homebuyers often end up the losers.
-
- On the surface, these premiums are legal. The lender
will pay your broker's fees; in return, you agree to a higher interest
rate over the life of the loan. But things can get a bit shady when the
deal's done behind your back. Moskowitz explains a typical scenario: Your
mortgage broker says you're eligible for a loan at 6.75%. A month later
interest rates drop and you qualify for a 6.5% rate. Trouble is, your broker
won't tell you. The lender is paying him a yield spread premium for keeping
you in the 6.75% loan.
-
- The result? Your broker gets a kickback of several thousand
dollars. Your lender gets a more profitable loan. And you pay an extra
$12,000 in interest on a $200,000, 30-year mortgage. After reviewing more
than 3,000 mortgages, Howell Jackson, an associate dean at Harvard Law
School, found that such premiums were paid more than 85% of the time. How
can you spot one before you sign on to a loan? The payment will appear
on your HUD-1 statement, a federally mandated list of loan expenses you'll
receive prior to closing. Usually it's noted cryptically as a "YSP."
If you see one, start shopping for a new " and better " loan.
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- 2. "Want to refinance? Get ready to wait a good
long time."
-
- Like many homeowners teased by rock-bottom interest rates,
Michael and Sharon Krasowski were hoping for a quick mortgage refinance
on their Cicero, N.Y., home. After paying $300 to lock in a 6.1% interest
rate last October, they were told by a rep at their bank, Wells Fargo,
to expect a November closing. But as November passed and December wore
on, the bank refused to commit to a closing date.
-
- One morning in mid-January, on the day the loan was finally
scheduled to close, a bank rep called with more bad news: There would be
several hundred dollars in additional closing costs. Frustrated but unwilling
to wait any longer, the Krasowskis closed on the loan. Sharon, still fuming,
says, "The people who write the loans try to process too many and
don't service the customers. They were uncaring." A Wells Fargo spokeswoman,
Ahnalee Luchtel, says, "We're confident we did the best we could given
the environment we were in."
-
- The Krasowski's tale of frustration is hardly unusual.
Many banks can't handle the heavy demand spurred by a drop in interest
rates. "Lenders don't staff for peak periods, so when you have a refinance
boom, the whole process slows down," says Jack Guttentag, a former
chief of domestic research at the Federal Reserve ( news - web sites) Bank
of New York. "When that happens, lenders give priority to new home
purchases, not refinances."
-
- To avoid delays, ask the bank how long it's taking to
process loans before you get started (typically, 45 days for a refinancing,
60 days for a mortgage). Even better, speak to customers who've completed
a transaction similar to yours. If you hear tales of woe, look elsewhere.
-
- 3. "Our zero% financing on car loans is just a big
tease..."
-
- You've seen those great deals being offered by the auto
industry: No money down and zero% financing! Sure, it's a sweet offer "
but cool your engines before you speed down to the dealership.
-
- Turns out, just 25% of car buyers who apply for zero%
financing actually qualify for the advertised terms. "It's only available
to people with top credit," says Rob Gentile, manager of the new-
and used-car price service for Consumer Reports. And even if you do qualify,
you might not be able to swing the payments. Zero% financing is generally
available only on 36- or even 24-month loans - on a $25,000 loan, your
payments could be more than $1,000 a month.
-
- Unless you're certain you'll qualify for zero% financing,
get loan quotes from at least three banks or credit unions before you head
for the dealership. That way, you'll still be prepared to negotiate a loan
from your dealer that at least has better terms than the banks are offering.
4. "...plus we'll smack you with hidden fees." once you've negotiated
the car's price and interest rate, you're set, right? Wrong. Unscrupulous
dealers will quote you a monthly payment supposedly based on the car's
price plus finance charges. What they don't say is that the payments include
undisclosed add-ons you don't want or need. "It's a widespread practice
in the used-car industry," says Paul Richard, executive director of
the Institute of Consumer Financial Education in San Diego.
-
- Common add-ons - loan application fees, warranties, credit
insurance and tow insurance " serve only to profit the dealer. "In
most cases, the dealer gets to keep half or three-quarters of the premium
on these products," says Richard. You can avoid getting ripped off
by asking the dealer to detail all charges before you sign for the loan.
Then, reject everything beyond the original negotiated price of the vehicle.
-
- 5. "Repaying your loan faster will cost you."
-
- Soon after you close a loan, you'll likely get a letter
from your lender offering a new payment plan. The claim: You can save thousands
in interest by sending half your monthly loan payment every two weeks.
You'll just need to pay a third-party program provider an upfront fee (typically
$300) and then $5 every two weeks.
-
- Tempted? Lots of people are. In fact, Paymap, the largest
provider of such services (it offers its program through lenders such as
Chase, Wells Fargo and Citi Mortgage), says more than 622,000 borrowers
are currently enrolled in its Equity Accelerator plan, twice as many as
in 1997.
-
- But here's the real deal behind these plans: Payments
are applied to your loan only once a month. The only reason you save interest
is because the biweekly payment forces you to make the equivalent of one
extra monthly payment every 12 months. You could save just as much by making
that extra payment yourself - and your bank won't charge you a fee.
-
- Jon Leon Guerrero, Paymap's corporate training and development
specialist, concedes that biweekly payments have no advantage over an extra
annual payment. "But only 3% of mortgage holders across the country
make extra payments on their own," he says. "Our program helps
people who wouldn't pay off their loan any faster if left to their own
devices."
-
- 6. "Your credit report won't get a boost from us."
-
- If you're a model borrower, shouldn't your lender report
your payment history to the credit bureaus? After all, it's the only way
you can boost your credit score and get a lower interest rate on future
loans.
-
- Unfortunately, there's no law requiring lenders to report
your payment history, and too often they don't. "They don't want to
lose accounts to other lenders who can offer better rates," says Jan
Davis, an executive vice president with credit bureau TransUnion. Before
you take out a loan, find out if the lender reports to at least one of
the three major credit bureaus: TransUnion, Experian and Equifax. If you
already have a loan, check your credit report to make sure payments are
recorded. If they're not, call your lender and request it. And if the lender
refuses? "Consider moving your business elsewhere," says Davis.
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- 7. "Our fees are phony, but pay them anyway."
-
- Oscar Recalde was delighted when he found a bank willing
to refinance his mortgage at 6.625%. "I had spent hours researching
the lowest rates," says the Fairfield, Conn., graphic designer. But
just before closing, his wife noticed the fee schedule. There were dozens
of inexplicable charges totaling more than $4,000. There was a lender inspection
fee, for example. "That's a new one!" chortled one mortgage expert
whom Recalde contacted. And what about that $195 notary fee? Most lenders
charge $30 for the same service. Disgusted, Recalde pulled the plug on
his loan.
-
- As he discovered, shady banks sometimes charge for nonexistent
services, or boost the fees charged by third parties such as property inspectors.
What to do? Jack Guttentag warns against questioning individual fees since
it's hard to tell whether the bank's explanations are bogus. Instead, compare
the total fee package charged by several lenders before you make a commitment.
-
- Keep in mind, just because your lender asks for a fee
doesn't always mean you have to pay. "The fees are usually negotiable,"
says Robert Withers, CEO of First Alternative Mortgage. "If a good
applicant says, "I'm paying an application fee and an underwriting
fee, why not waive one?' I'll say, "Why not?' I want the borrower
to be happy."
-
- 8. "A margin call doesn't mean we'll actually call
you."
-
- Investors know that when they buy stocks through a broker
on margin, they'll need to cover their loan should their stocks take a
dive. The hope: They'll get an opportunity to deposit some cash rather
than liquidate stock. Deborah Tang never got that chance. She was shocked
when she discovered that her broker, E*Trade, had sold off four-fifths
of her stake in AOL to meet a margin call last May. "They never gave
me any notice," says Tang, a Sacramento program analyst. "If
they had called or e-mailed, I would have covered the call. As it is, I
lost $19,000." When she called customer service, all she got was a
lecture on the importance of checking her account on a daily basis. "They
said I can't expect E*Trade to contact me," she says.
-
- Connie Dotson, E*Trade's chief communications officer,
says that in typical market conditions, a margin call will trigger an alert
sent to the customer's online account, along with a next-day mail-gram
and a phone call. Still, she says, "there's no guarantee, because
there may be extraordinary circumstances."
-
- Surprise: While most brokerages will notify you of an
impending margin call, no regulation requires them to. You can question
your broker about its practices before you trade on margin, but don't bank
on what you hear. Most brokers don't have a notification guarantee you
can hold them to. "The deck is stacked against the investor,"
says Vincent DiCarlo, a former SEC lawyer who represents individuals. "Most
times people who have margin blowouts are completely out of luck."
-
- 9. "Be smart: Don't consolidate your student loans."
-
- You finally got your MBA, and now you're hypnotized by
ads touting the benefits of student-loan consolidation. It's no wonder.
This past July rates on these loans dropped to a 40-year low: 4.125%. For
many, it's a great time to refinance your variable-rate loans with a single
fixed-interest loan. Just be careful.
-
- Patricia Scherschel, consolidation product executive
for education lender Sallie Mae, warns that some borrowers lose important
benefits by consolidating. If you always make your payments on time, for
example, you're likely enjoying a reward rate just over 2%. Your postconsolidation
rate would be higher, costing thousands in interest. You could also lose
the ability to defer your loan payments, and if you consolidate your debt
with your spouse, you become responsible for that loan, even if he or she
bolts to Mexico.
-
- Unfortunately, some lenders don't care whether consolidation
is really in your best interest. "We've been getting calls from consumers
who say their lender advised them to consolidate even before the rate dropped
in July, which is crazy," says Barry Morrow, CEO of student-loan provider
Collegiate Funding Services.
-
- 10. "We'll give you a severe case of PMI."
-
- After property values rose in Coon Rapids, Minn., John
and Corrine Lee Thomas were certain that their home equity topped 20%.
That meant (or so the Thomases thought) that they would no longer have
to pay $60 a month for Private Mortgage Insurance (PMI) " insurance
to protect against foreclosures that lenders require of borrowers who make
small down payments. Federal law lets homeowners request cancellation of
PMI if they can prove their home has appreciated enough to create 20% equity,
and some states, including Minnesota, let them cancel it outright. Unfortunately,
as Richard Roll, president of the American Homeowners Association, puts
it, "PMI only protects the lender, and they don't want to weaken that
protection."
-
- The result: Some lenders can make it nearly impossible
to cancel PMI. In the Thomases' case, their lender, Countrywide, refused
to accept the first appraisal the couple obtained, telling the Thomases
that they had to use a Countrywide-certified appraiser. The Thomases then
found an appraiser off Countrywide's list, but that appraisal got rejected
too. Countrywide insisted they had to hire an appraiser through an affiliated
company. Finally, the Thomases gave up and got rid of PMI by refinancing
their loan. In a settlement the state of Minnesota reached on behalf of
consumers like the Thomases, Countrywide denied any wrongdoing, but agreed
to compensate customers who paid PMI.
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