How to keep your
friendly banker from robbing you blind
If you are a person of average means and
assets, your bank will rob you of well over $100,000 during
your lifetime. You will pay more than you should for your
mortgages, credit cards and other loans. You will be cheated
out of a fair return on your savings and bank IRA deposits.
And along the way, you will be outrageously overcharged in
fees and penalties for every service your bank provides.
Bankers are not your friends.
Bankers are, in fact, your worst financial
enemies. The community banks, which once weighed a loan
applicant's character above his collateral, are being
squeezed out by a handful of big banks.
These huge institutions cater to major
corporate accounts and are scarcely regulated by the
government, which depends on their financing to keep it
afloat. The banks' attitude toward small customers is
simple, our way or the highway.
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Basic Rules
 | Do business with one of the smaller
banks in your market area, where you will have most
leverage in negotiating more favorable terms.
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| Comparison-shop each banking service
among at least three institutions. After you find the
best deal, negotiate for even better terms.
| Forget about finding a one-stop
financial supermarket. You may wind up at Bank A
for a checking account, at Bank B for a savings
account and at Bank C for a mortgage. Anyway,
banks do not value your loyalty. They value only
your money - and the more of it they can take from
you, the better they like it.
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| The mortgage is the largest
investment most people ever make and the one where
banks take greatest advantage. Most people decide on a
mortgage based on whether they can afford the monthly
payments. They rarely consider-nor do banks openly
disclose that at prevailing interest rates, homeowners
repay about $4 for every dollar they borrow over the
standard 2 or 3 year term. In other words, a $100,000
mortgage will cost them about $400,000.
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Advice:
Accelerate your payments
against the mortgage's outstanding principal. A negligible
increase in your monthly payment, per-haps 4%,
can save you 25% or more of the amount you ultimately
repay the bank, and shorten your obligation to 20 years or
less. While some experts advise keeping the longer term
for its tax advantages, this is a big mistake for the
great majority of consumers. Even if you are in the 28%
tax bracket, every dollar of unnecessary interest will
still cost you .72 after taxes-money you could be
investing for your own benefit rather than the bank's.
Other mortgage scams:
| The adjustable rate mortgage (ARM)
represents the banking industry at its worst. It is a
blatant marketing gimmick-complete with the deceptive
come-on of an initial "discount-ed" rate-that
fleeces the most vulnerable and overextended. The ARM was
created to ensure that banks might skim the absolute
maximum from their borrowers, no matter where interest
rates head. The risk is virtually all yours. (1t is also
possible, of course, that interest rates will fall-but
since bankers control the rates, rates will always fall
more slowly than they rise.)
| Unfortunately, the prime interest
rate will tend to increase in reverse proportion to
our economy's health.
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| In other words, your mortgage payment
soars just when it is most likely that you may lose
your job or business. Even if you hold steady, there's
a fair chance you won't be able to afford the larger
payments. Consider that if your ARM is based at 10%
interest and then rises to 13%, your interest costs
have actually risen by 30%-not the innocuous sounding
"three percentage points" advertised by
your bank. On a $100,000 mortgage, that could
translate to several hundred dollars more a month-a
prescription for foreclosure.
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Advice:
Stick to a fixed-term mortgage, un-less
you are certain you will be selling your house before your
ARM interest rate can substantially increase.
| Negative amortization mortgages are
special ARMs that allow for fixed monthly payments
regardless of interest-rate fluctuations. What most
customers don't understand (and what most bankers fall to
make clear) is that the bank may be siphoning their equity
into its profit center.
| If the mortgage rate rises, the
difference between what you pay each month and what
you owe is assessed against a balloon payment, usually
due in five years. At the end of the bal-loon, you may
actually owe more than you did when you took out the
loan. Aside from pocketing your interest payments,
the bank now owns substantial portion of your down
payment.
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Worst case:
When you need to refinance the loan after
paying off the balloon, your increased mortgage needs may
exceed the property's appraised value. After the banks turn
you down, you may have no option except to sell the house at
a loss.
Advice: Avoid this one at all costs.
| Reverse mortgages, recently in vogue. are
supposed to enable people (mainly the elderly) to stay in
their homes when they are no longer able to afford upkeep
expenses. The borrower receives a monthly check from the
lender, either for a set term or until the borrower dies.
The loan balance plus interest is repaid by the sale of
the house.
| This new mortgage vehicle is very
popular these days. In most cases, however, it is a
gigantic rip-off. After 30 years of monthly mortgage
payments, the homeowner trades in all that equity for
five or 10 years of moderate income.
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| An "open-term" reverse
mortgage allows for permanent residence until death,
but it is available only on premium homes in excellent
condition. And if something unexpected happens to the
elderly homeowners, the bank has hit a bonanza.
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| Home-equity credit lines
represent new pack-aging for a dog-eared product-the
second mortgage. While they remain tax deductible, that
advantage is quickly wiped out by fees for the
application, credit check, appraisal and closing among
others. For every dollar you save in taxes (versus an
unsecured personal loan, for example), you may pay the
bank $2 in fees.
| Since your home equity is your least
liquid asset, you should save it for true emergencies.
Any other purpose (to finance a car or home
improvement, for example) represents an un-acceptable
risk. If you default on the loan, after all, you could
be faced with foreclosure. |
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Source: Edward F Mrkvicka, Jr , author of
"The Bank Book How to Revoke Your Bank's License to SteaI."
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Copyright © 2001-2006 ThePitMaster.com
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