Copyright © 2006 Ed Bagley
The next time you go borrowing, and your friendly banker smiles as you walk into his office, be aware that you may be snookered by someone not worthy of your trust. If your banker is an attractive woman, then you are even more susceptible.
I have grown over the years to appreciate a certain breed of bankers as one of the lower life forms that inhabit planet Earth. What I am about to share with you is even more true of certain mortgage brokers, secondary lenders and financial predators. They operate as sleazy parasites under the guise of helping the least creditworthy consumers who have virtually no savvy in financial matters.
Rather than pick on the worst of this collection of lenders who will help relieve you of your money without any conscience, I have targeted bankers. Before the banking industry was deregulated there were many people who considered bankers worthy of some trust and admiration. Those days are over.
Bankers still enjoy the best reputation (such as it is) among these lenders, but they have no problem patting you on the shoulder while picking your pocket and telling you how much they have helped you. I do not intend to indict the entire lending industry, just 95% of it. Here is an example:
My 24-year-old son wanted to refinance his first mortgage and was about to go to a leading lender in the market to look at its loan proposal. I decided to tag along because I know how lenders operate, especially when dealing with younger clients and senior citizens who have not handled the finances in their family.
His present loan had a principal balance of $123,773 with 7.458% interest at a 30-year fixed rate. The proposed re-fi was for $134,999 with 9.9% interest (10.28% APR) at a 30-year fixed rate. The re-fi would cover the $123,773 principal balance due and provide a $10,409 home equity loan. The lender was actually smiling when he outlined what a good deal this was for my son.
I had coached my son to simply listen to the proposal, commit to nothing, take the paperwork with him, and tell the lender he would study the proposal and let the lender know if he wanted to proceed.
Once away from this flytrap I took my son to lunch, and we discussed the great deal he was given.
First, I had him look at the 3% discount fee on the Good Faith Estimate of the closing costs. (The discount fee is the amount you are paying for the privilege of getting the loan.) The discount fee was listed at $312.
What the lender was not telling him was that the 3% discount fee was figured on the $10,409 home equity loan and not on the $134,999 for the total loan which was $4,050, a slight difference of $3,748 in their favor.
If you called the lender on this discrepancy, he would probably say, “Oh, you’re right, that’s a mistake. That’s the figure for the home equity loan. Jeez, I’m sorry.”
When the day comes to close the loan, you see the bloated figure and object, and then the lender multiplies the $134,999 loan times 3% and viola, it comes up correct. You are dazed and confused, feel under pressure, want to get this over with and sign on the dotted line. This happens every working day in America when loans are closed.
Long after you are gone, the lender is quietly snickering, counting up the additional funds he will earn, and welcoming the next dumb bunny who comes through the door while you will be stuck with making payments for 360 months on a lousy loan.
For the uninitiated, there are more real surprises at loan closings in America than when opening gifts on Christmas morning. One client of mine went to a loan closing and learned that $10,000 had been added to the loan closing costs without prior notice; he thankfully got up and left.
Always remember that for every liability you have, you are someone else’s asset. For every liability—such as a mortgage, credit card, car loan or school loan—you are an employee of the company lending the money.
If you take out a 30-year mortgage loan, you have become a 30-year employee of the company which lends you the money. This is a very sobering thought when you are paying attention, as you should be. I am not talking about anything important in this article, just your financial health.
Part 2 of this article will take the financial details of the loan apart and show how not taking the loan will save my son $157,495.