5 Dirty Tricks Banks And Brokers Don’t Want You To Know About

Don’t get me wrong. Not every bank/broker is dishonest, but there are definitely enough of them out there that I know of that shouldn’t be in the business. Some might take the position that the following “Dirty Tricks” aren’t dirty at all. My response is, if they aren’t dirty, then why is it that so many of the clients I deal with tell me they didn’t get all the facts from their previous banker/broker till they heard it from the bank attorney at the closing?

Here’s my top 5 list of dirty tricks banks and brokers don’t want you to know about:

Dirty Trick #1:

NegAm Loans or Option Arms are the hot product at the moment with every mortgage company. People are eating them up because they’re advertised with a 1-4% interest rate. Bankers and brokers get paid a ton of money to sell these things. They usually come with 3 points built into the rate and a 3 year pre-pay! They’re taught to pitch the rate and payment and to only skim over the rest of the details. Here’s what you need to know.

NegAm or Option Arm is just a fancy way of not calling the loan what it really is, a Negative Amortization loan. Here’s a loan that’s payments are so low that they don’t even cover the interest owed every month. Every month you make your minimum payment the mortgage balance goes up. You keep losing equity until the loan is “recast” usually around the 3rd year. What recast means is they can raise your payment (like 200% or more!) to “help” you catch up on the equity you’ve lost.

You can even end up owing more than your house is worth. If you have an interest only or adjustable loan and someone calls you to sell you this type of loan…run.

Dirty Trick #2:

Beware of companies that push Interest Only mortgages. These programs are harmless enough when used correctly, but what I’ve seen doesn’t qualify. I’ve seen banks and brokers use these programs for first time homebuyers who otherwise could never afford a home. They’re so excited to buy a home they let themselves be pushed into a program that will eventually hurt them financially.

Look, if your monthly debt payments, including your proposed mortgage, taxes, and insurance, are more than half your monthly income, you can’t afford that house. End of story. When a bank or broker states your income is higher than it is, then uses an interest only loan with an adjustable rate mortgage just to get you in the house, you’re destined for foreclosure. The adjustable rate will adjust, the interest only part of the loan will expire, and you’ll have to scramble to keep up with the rising payments until you’re broke.

Dirty Trick #3:

Most lenders charge a monthly fee when you borrow or owe more than 80% of your home’s value on one mortgage. They call it “Private Mortgage Insurance” or PMI. This is ton of cash you give to their private mortgage insurance company to insure them, the lender, in case you default. It doesn’t cover you at all.

The truth is that it’s almost always cheaper to break the loan up into two mortgages. The combined payment is almost always lower than the one, and there’s no PMI either.

Dirty Trick #4

Pre-payment penalties are fees some banks charge you if you try to payoff more than 20% of the loan in the first few years either by selling or refinancing your house. The problem is if you’re stuck in a bad loan, you’ll have to pay to get out.

A few states, like NY, have made these penalties illegal, but some crafty lenders use federal charters to charge them to you anyway.

What I mean is that the federal government can override state laws, so some of these bankers use the government to charge you more! As much as 6% of your loan size just to get out of your loan!

Unless you’re taking a fixed mortgage, steer clear of prepayment penalties. There are plenty of banks who don’t have them.

Dirty Trick #5:

This is the biggest dirty trick of them ALL. Bankers get something called a “Service Spread Premium” when they sell their loans. Brokers get “Yield Spread Premiums”.

Whatever they want to call it, it means the bank could have gotten you a lower rate and payment, but instead decided to lower your rate just enough to make the deal worth while for you while they pocket the rest of the cash. The banks and brokers make more money and you get higher payments.

There are certain situations in which all of these “tricks” are valid and useful. When they’re used in the client’s best interest, for one. But when they’re used to make the bank or broker more money at the client’s expense, then in my opinion, they’re as dirty as the day is long.

Brian Diez
AKA The Mortgage Insider
See my blog at briandiez.blogspot.com/ briandiez.blogspot.com/

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