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Getting a new mortgage? Watch Out!
Mortgage brokers (even at banks) get paid on commission. As interest
rates rise, they must become more creative to make a living. Many
are honest, but there’s plenty that won’t blink an eye at taking
advantage of uninformed consumers. Don’t be one of them!
In my previous two articles, I’ve shared how and when Interest-Only,
Option-ARM and Reverse Mortgages should and shouldn’t be used. (Read
them at www.guardingyourwealth.com.) I’ve warned readers to be very
careful when refinancing or purchasing a mortgage because the person
you are dealing with may not have your best interest at heart. Here
are some true stories that clearly illustrate that.
David shares, “A licensed securities dealer has proposed that I take
$300,000 in equity out of my house before home values plummet and
invest the entire amount in an "investment grade" life insurance
policy, specifically an Equity-Indexed Universal Life (EIUL)
policy.”
He described in detail how this would allow any future growth, loans
and death-benefits to be tax-free. He also listed some of the
negatives, such as the high cost of the insurance policy and other
expenses. The advisor had shown him that he could pay off his house
after 10 years with the investment, with money left over.
He closed by saying, “It sounds almost too good to be true. Is this
program too risky, or too expensive, to warrant investing my home
equity?”
Of course it’s too good to be true! It doesn’t make sense to tap
your home’s equity for any investment. His home had probably been
the best investment he had ever had. He was earning a guaranteed 6%
or so (the interest rate on your mortgage) while increasing his
equity at the same time. Don’t put that at risk.
This is just one of the new schemes developed by agents to keep the
commission dollars flowing. People like David, who are not retired,
don't have a lot of investable assets for 'advisors' to go after.
The bulk of most people’s investable assets are in a 401(k) or other
company retirement program.
The 'pot of gold' that pre-retirees do have is the equity in their
home. Because homes have appreciated, many have significant equity.
This scheme allows agents/advisors to tap that money when they
otherwise couldn't.
In this specific case, the agent could be making $85,000 off of this
transaction! No wonder it sounded like such a good idea! To be
frank, this borders on a scam and is not consistent with any good
financial planning principles. This 'advisor' should lose his/her
license.
’Av’ wrote about a horror story involving her parents’ purchase of
an Option-ARM mortgage from an unscrupulous mortgage broker. To be
safe, her parents included other family members in the talks with
the mortgage broker. He laid out all the details, including the most
intriguing part: an interest rate of only 1.65%. He assured them the
payments would only be $300 per month. They couldn’t believe it and
asked him several times to verify that information. Based on his
assurances they took the mortgage.
Then the first payment coupon came. She says, “Imagine my shock when
(the real interest rate) was 5.6%. I called…and got the run around.
I was told the payment hadn’t gone up.” The true amount due just to
cover the interest was considerably more then the $300 they
expected. By paying just the $300 their amount borrowed would
continue to increase.
Before the sale, the mortgage broker had been so trustworthy and
always quickly returned their calls. Now he gave them the cold
shoulder. When they finally reached him, he said “You’ve signed the
papers and that’s that.”
Clearly frustrated, she says, “So I am paying about 6% interest on a
loan that 4 adults heard was only going to be 1.65%…we were played
the fool big time and I want to warn other people.”
Don’t accept any mortgage broker or other financial advisors’ word
on something. It must be in writing. If you don’t understand the
contract, take it to a lawyer or a Certified Financial Planner who
doesn’t have an interest in the transaction for an objective point
of view. Be careful so you don’t become the next horror story.
Have a financial question? Send me an email and I’ll personally
respond, free of charge. Go to www.guardingyourwealth.com and click
on ‘Ask Jeff’.
In addition to being a nationally syndicated columnist and Certified
Financial Planning Practitioner, Mr. Voudrie provides personal,
private money management services to clients nationwide. |
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