A Raw Deal

A RAW DEAL?

(Cash out, debt consolidation and Pick a Pay. Beware of the pitfalls in these popular loans.)

When I first made the switch from Financial Advisor to Mortgage Consult I was appalled by some of the practices that seemed to be common place in the industry.

The first one that came to my attention was the practice of wrapping short term debt into long term debt. “Could this be true?” I asked myself.

Using a mortgage calculator in ran the numbers.

Loan Amt. Int Rate Term in months P&I Paid/Month Total Over Life of Loan

15,000 9.99 60 318.63 19,117.80

Loan Amt. Int Rate Term in months P&I Paid/Month Total Over Life of Loan

15,000 7.25 360 102.33 36,838.80

“Could this be legal?” I had asked a co-worker. Not only was it true and legal, it was the bread and butter of ninety nine percent of the loans I saw fund. I saw car loans at 1.99 % rolled into the mortgage note at 8%. So how does one sell that to a potential client? It made no financial sense to me, and coming from the heavily regulated securities industry, it would have been blatantly illegal. Regulators will look at the very real fact that you put your client into an investment that is going to cost him seventeen thousand dollars, or so. That is the equivalent of taking your client out of Oppenheimer growth fund and putting him/her into a Franklin Templeton growth fund with a four percent front load fee. You can say goodbye to your license.

Then I became introduced to the Liar Loans, or by their official names, the Stated Income Loans, but for the purposes of this article I am not going to go there. Suffice it to say, that just because the loan is available, does not mean it is a good idea for you, and it wasn't for millions of homeowners.

Pick a payment loans were also very popular. Again, just because the loan is available does not mean it is a good idea. It seems that people in general chose to pick the lowest payments in their pick - a- pay mortgage plan and then adjusted their lifestyle accordingly. Suddenly they had seven hundred dollars a month extra. That fifty thousand dollar SUV suddenly got affordable. That second motorcycle just became a reality; right after, 'the first vacation we've had in years'. People adjusted their lifestyle accordingly and it came back to bite them sooner than later. Take a look at what Sandra Block has to say. If you have one of these loans, or were thinking about it read her article. http://www.usatoday.com/money/perfi/columnist/block/2005-07-18-pick-a-payment_x.htm

While it is not a recent article, she does a great job outlining these risky programs and hopefully people will think twice if they are talking to a lender who suggests this kind of loan.

Now I am not saying that debt consolidation, like in my first example is wrong. There is a time and a place for that kind of loan, even the pick- a- payment option, and one must examine his/hers needs before taking out that extra thirty thousand of your homes equity, or signing up for that Option Arm deal. Too easily people are lured into taking the cash out option. After all, its their money, so to speak, and it's not doing anything now. Too many people take the extra cash even when it would mean a newer higher note payment that was going to be tough to make.

“But that's okay, I have all this cash in the bank that I can use for awhile to make up the shortfall. That is the kind of thinking that leads to foreclosure down the road. Again, there are times for this loan. If you truly cannot make your mortgage payment because of the thirty thousand dollar credit card debt, that overall monthly payments you have been failing to make would suddenly become easy. As it is wrapped into your house note your overall output drops an astounding one thousand dollars a month. Maybe you do need to do a debt consolidation in order to keep your head above water. Notice I have used the term debt consolidation rather than cash out. Cash out will not help you after the cash has been used to make up the shortfall you have on your monthly mortgage payments. Paying off high interest debt and stretching it out to thirty years may provide the relief you need.

Be wary of the broker who is eager for you to take that extra fifty grand out. Most in the business are compensated on loan amount so the bigger the deal the sweeter it is.

Make sure the professional you are working with has a good grasp on what your needs are. There may be programs out there that would fit with your needs perfectly, but do not get brought up because he did not know some of the key issues you had.