Related Services - The following companies and services offer a wide variety of financial programs to assist you with handling your debts. Consolidate your bills with a debt consolidation loan or use a debt management or credit counseling service for help with your credit card bills and other payments.
- Personal Loan Companies - Need a smaller loan? Personal loan financing is most often unsecured. Meaning... your home or personal property is not used as collateral and the loan decision will typically be based upon your credit history and your ability to make the necessary payments. Also, this is often referred to as a signature loan.
- Debt Settlement - Too much debt? List of companies providing this alternative to bankruptcy that provides for debt negotiation and arbitration services for those that need to eliminate debt.
- Credit and Debt Management - Too many credit bills for you to handle with your budget? Compare different programs and find the one that is the right match for your individual situation.
Avoiding Costly Banking Mistakes: No Trivial Pursuit
Here are clues to preventing expensive errors with your checking account, credit card or other financial services. After all, this isn't play money!
Getting a nontraditional mortgage without understanding the costs
In addition to "traditional" mortgages, which are typically fixed- or adjustable-rate loans for 15 or 30 years, many lenders now offer other mortgages with new features that may be good options for some borrowers but costly mistakes for others.
Nontraditional mortgages generally enable borrowers to lower their monthly payments in the early years in exchange for larger payments later on. An "interest-only mortgage" lets you pay back only the interest on the loan for several years without paying any principal (the amount of money you borrowed). A "payment-option loan" allows you to decide how much to pay from one month to the next based on choices that range from a full monthly payment (what you'd normally pay in principal and interest with a traditional mortgage) to a minimum payment that may not even cover the interest due. Any shortfall is added to your loan balance. Payment-option mortgages usually have adjustable interest rates.
What are the biggest concerns with these types of loans? "Borrowers may experience payment shock if they aren't prepared for increased payments after an initial or promotional period," said Marshall.
For example, let's say a family borrows $200,000 using a 30-year, payment-option mortgage, with a five-year promotional period. For the first five years, they pay only the minimum amount due of $650 a month. That payment isn't enough to cover the interest actually being charged. The unpaid interest during those five years — figure about $16,000 — is added to the loan balance. "At the end of the five years, the borrower will be paying the loan at a higher interest rate and on a larger loan amount," Marshall said. In this example, starting in the sixth year, the family's minimum monthly payment will surge to about $1,600, more than double what they were paying before.
To protect yourself from unexpected costs with a nontraditional loan, be sure to ask the lender these two questions before agreeing to anything:
What will my monthly payments be at different times during the life of the loan? Find out when your payments will or could change, and how much higher the payments would be under different scenarios, such as if you only send in the minimum amount due in the early years or if interest rates go up dramatically. Think carefully about getting a nontraditional loan if you have doubts about your ability to pay more than the minimum payments in the future.
Does the mortgage have a prepayment penalty? If you pay off some mortgages early (say, within the first three years) by refinancing or selling your home, you may be charged a penalty that can amount to several thousand dollars. Some lenders offer loans with a prepayment penalty at lower interest rates than similar loans without the penalty. These can be a good deal if you don't expect to move within the penalty period, but triggering the penalty can make it more expensive to refinance the loan and can reduce your proceeds if you sell the house.
Also think twice before applying for another nontraditional mortgage that involves little or no documentation of income or assets. While these loans can save you time and are attractive if your source of income is unpredictable, the lender generally charges a higher interest rate. "If you have income that's easy to document, such as regular statements from your employer or a monthly Social Security payment, it's probably not worth paying extra over the long term of the loan just to save a few days during the application period," Marshall said.
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Fall 2006 |
No Trivial Pursuit |
Not Checking Up on Your Account |
Not Considering Bank Fees | |
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Last updated on 11/08/2006