15 Hidden Traps Debt Lenders Use to Rip You Off & How to Avoid Them

(April 3rd, 2007)

1. Watch out for the hidden costs: Lenders will hit you & casually inform you of many hidden costs just before you are about to close the deal.

Some of these costs include:

  • Administrative fees
  • Documentation fees
  • Processing fees
  • Underwriting costs
  • Other miscellaneous fees

They will hit you with all these fees just before you are about to close the deal, when they know you will NOT back out (backing out will be costly for you). To protect yourself, ask for a list of ALL these fees in detail upfront, before you even begin to bargain the deal. Then, ask them to give you all these fees in writing, with a valid signature. Ask your lender to give you a Good Faith Estimate, more about this topic can be read at: http://www.bankrate.com/brm/news/real-estate/buyerguide2004/closing-estimate.asp You can tell if your lender is trustworthy if he tells you about all these fees upfront, although by law, he is required to tell you all these fees 3 days after your initial application.

2. Low-Ball Closing Costs: Lenders will attract your attention and business towards them by offering you very low closing cost estimates. This is known as the "low balling" technique. Once they low-ball you into their system, they will reveal the actual high closing costs just last minute before the deal is closed. They know that it will be too late for you to back out of the deal. Some lenders will deliver you the actual closing costs day before you sign the mortgage settlement and you shall be forced to pay all the actual costs or risk losing your property. At this point, we should also define what closing costs actually are. Closing costs are the expenses incurred in acquiring your home. They usually range from 3-5% of the value of your home. Here's a list of common closing costs:

  • Buyer & Lender Attorney Fees
  • Mortgage application fees
  • Property appraisal fees
  • Mortgage broker's commissions
  • Lender Inspection fee
  • Underwriting fee
  • Mortgage Insurance Premiums (charged if your down payment is less than 20% of the value of your home)
  • Closing settlement fee
  • Notary fees
  • Title search fee
  • Credit report inspection fees
  • Interest charged from the day of mortgage settlement to the date of first payment
  • Property taxes from the day of mortgage settlement to tax year end

3. Fixed Locked In Interest Rate: Most mortgage lenders will lock you in with a fixed interest rate over the life of the mortgage loan, at the time of closure. If interest rates go up on the date of closure, you will have saved yourself some money (a lot of money) by locking in a cheaper interest rate. However, if the interest rate goes down while you locked in a higher interest rate at the date of closure, the lender will make some profit off you. Beware of some lenders though, they can use the following tactics:

  • If the interest rates drop before the date of closure, they will inform you that your interest rates are locked in at a higher percentage and they cannot change it.
  • If the interest rates rise before the date of closure, some lenders will inform you that your interest rate is NOT locked in, and you will therefore be charged a higher interest rate.

4. Floating Mortgage Interest Rates: If you select a variable interest rate instead of a fixed rate, your monthly mortgage payments will vary and change all the time, in accordance with the fluctuations in the market. Some lenders will add 1-3% points on top of the interest rate fluctuations in the market, to make some extra money off you. Clarify with the lender in writing exactly how many percentage points of interest they will add on to the floating mortgage interest rate. Make sure you get this in writing, word of mouth means nothing!

5. Discounts and On Time Payments: Lenders are nice in the form that you will get discounts on your mortgage loan if you make regular on time payments for a certain # of years. However if you miss even 1 single payment, some lenders will take away all these years of discount from you, thus making you pay a larger monthly mortgage bill. Check with your lender on the grace period allowed, if you are not able to make your payments on time (even if its for 1 single month).

6. Online Mortgage Applications: Some lenders will offer you additional discounts if you make your application on the Internet and communicate with them only via email. However, these discounts and any benefits you get will be taken away from you if you change your email address without notifying the lender, or if they send you a mail and it bounces 2 times within 48 hours. You can never trust computers, sometimes your Email program crashes and you can not receive email within 24 hours. This is a high risk loan and should be ultimately avoided, if possible.

7. Automated Monthly Debt Payments: Many lenders prefer setting up your bank account so that your monthly mortgage payments are automatically debited from your accounts. This helps the consumer avoid paying late fees for missing 1 or more payments. This is also advantageous to the lenders in that they will receive regular on time payments without having to pester the borrower. The problem in this scenario arises when the mortgage settlement dictates the borrower to set up an Automated Clearing House (ACH) within 30 days of the settlement. If the Automated Clearing House (ACH) does not get implemented within these 30 days, you will lose all your discounts and will probably have to pay penalties.

8. Credit Reports & Bureaus: It is important that credit lenders report accurate information to Credit Bureaus so that your Credit Report looks good. There are lenders however who whill try to ruin your credit no matter what. For example, if you make regular on time payments, they will not report this good information to Credit Bureaus. However, if you miss 1 single payment, they will report this late payment immediately. Furthermore, some credit card lenders will not report your credit limit. For example, if your credit limit is $1000 and you have used up $200, your Credit Utilization is 20%. If your credit limit is NOT known to the Credit Bureaus and you use up the full $200, credit bureaus will assume you are fully using up your $200 limit. This obviously has a negative impact on your credit report.

9. Avoid Late Payments: While some lenders will offer you grace period incase you are late in making your monthly payments, other lenders just wait to pounce on you so bad. Make 1 single late payment and they will report this to the Credit Bureaus and skyrocket your interest rates. If you dispute this, they will show you the fine print in that little mortgage settlement agreement you signed.

10. More Credit Cards = More Debt: Most credit card issuers will issue low credit limits and low # of credit cards to borrowers with high risk of default. There are other issuers however who will offer many cards to high risk borrowers with very low credit limits. Why? They will have more payment due dates to remember + more money to spend which is NOT theirs + more late fees + more penalties = more debt piling up. Instead of having multiple credit cards, stick to the one with the lowest APR and keep your credit history alive and well by using only that 1 credit card. If you need a credit limit increase, ask your lender to give you one.

11. Credit Card Balance Transfers: If you transfer your credit card balance from one credit card company to another, be very careful because if payment is made through a check, you could be charged interest from the date the check was written to the date the check was cashed in. What's worse, both your old credit card issuer and your new one could charge you this interest fee. To avoid this, check with your lender's interest policy and preferably select an Electronic payment to avoid the time delay of check processing.

12. The PrePayment Penalty: This penalty applies if you pay off a large portion of your loan (the principal amount) or the entire loan, within a short period of time. Many borrowers like to pay off their loans with minimum interest paid, but lenders obviously want their own interest revenue as well. Check the fine print of your loan settlement agreement. If you are sure that you will be paying off your loan within a short period of time, search for loans that have no prepayment penalty attached to them.

13. No Down Payment or Low Cost Loans: Loans that offer 0% down payment or very low monthly payments actually sound too good to be true. The payments on these loans are very low because the interest you are SUPPOSED to be paying is actually added to the principal of the loan. Your loan amount therefore actually gets bigger every month; you think you are paying off your loan, however you are actually piling up more debt!

14. Inactivity Penalties: If you hold multiple credit cards and use only 1 of them daily, you will be shocked when you see the interest rates on those other inactive cards skyrocket due to inactivity. Yes its true! If you do not regularly use your credit card and have a long period of inactivity, your credit card issuer will hike up the interest rate without informing you. When you do actually charge expenses to these inactive credit cards, you shall be in for a surprise when you receive the credit card statement upon month end. What's more, you'll have no choice but to pay these higher credit card bills or face a negative entry on your credit report.

15. Increased Debt Load: A 2005 survey by Consumer Action found that if you apply for a mortgage loan or a car loan or even a new credit card, that warrants sufficient grounds for your credit card issuer to increase your interest rates. This is because they think you will be taking on an increased debt load and will be in higher risk of default.