10 Things Your Lender Won't Tell You

In some circumstances, these premiums are legal, and even helpful: the lender will help you pay closing costs such as the broker's fee; in return, you agree to a higher interest rate over the life of the loan.

But things can get a bit shady when the deal's done behind your back. Say your mortgage broker says you're eligible for a loan at 6.75%. A month later interest rates drop and you qualify for a 6.5% rate. Trouble is, your broker won't tell you. The lender is paying him a yield spread premium for keeping you in the 6.75% loan.

The result? Your broker gets a kickback of several thousand dollars. Your lender gets a more profitable loan. And you pay an extra $12,000 in interest on a $200,000, 30-year mortgage. After reviewing more than 3,000 mortgages, Howell Jackson, an associate dean at Harvard Law School, found that such premiums were paid more than 85% of the time. How can you spot one before you sign on to a loan? The payment will appear on your HUD-1 statement, a federally mandated list of loan expenses you'll receive prior to closing. Usually it's noted cryptically as a "YSP." If you see one, find out whether the increased interest rate is really justified by lower closing costs. If not, start shopping for a new — and better — loan.

2. "Want to refinance? Get ready to wait a good long time."
Like many homeowners teased by rock-bottom interest rates, Michael and Sharon Krasowski were hoping for a quick mortgage refinance on their Cicero, N.Y., home. After paying $300 to lock in a 6.1% interest rate last October, they were told by a rep at their bank, Wells Fargo, to expect a November closing. But as November passed and December wore on, the bank refused to commit to a closing date.

One morning in mid-January, on the day the loan was finally scheduled to close, a bank rep called with more bad news: There would be several hundred dollars in additional closing costs. Frustrated but unwilling to wait any longer, the Krasowskis closed on the loan. Sharon, still fuming, says, "The people who write the loans try to process too many and don't service the customers. They were uncaring." A Wells Fargo spokeswoman, Ahnalee Luchtel, says, "We're confident we did the best we could given the environment we were in."

The Krasowski's tale of frustration is hardly unusual. Many banks can't handle the heavy demand spurred by a drop in interest rates. "Lenders don't staff for peak periods, so when you have a refinance boom, the whole process slows down," says Jack Guttentag, a former chief of domestic research at the Federal Reserve Bank of New York. "When that happens, lenders give priority to new home purchases, not refinances."

To avoid delays, ask the bank how long it's taking to process loans before you get started (typically, 45 days for a refinancing, 60 days for a mortgage). Even better, speak to customers who've completed a transaction similar to yours. If you hear tales of woe, look elsewhere.

3. "Our 0% financing on car loans is just a big tease..."
You've seen those great deals being offered by the auto industry: No money down and zero% financing! Sure, it's a sweet offer — but cool your engines before you speed down to the dealership.

Turns out, just 25% of car buyers who apply for zero% financing actually qualify for the advertised terms. "It's only available to people with top credit," says Rob Gentile, manager of the new- and used-car price service for Consumer Reports. And even if you do qualify, you might not be able to swing the payments. Zero% financing is generally available only on 36- or even 24-month loans — on a $25,000 loan, your payments could be more than $1,000 a month.

Unless you're certain you'll qualify for zero% financing, get loan quotes from at least three banks or credit unions before you head for the dealership. That way, you'll still be prepared to negotiate a loan from your dealer that at least has better terms than the banks are offering.

4. "...plus we'll smack you with hidden fees."
Once you've negotiated the car's price and interest rate, you're set, right? Wrong. Unscrupulous dealers will quote you a monthly payment supposedly based on the car's price plus finance charges. What they don't say is that the payments include undisclosed add-ons you don't want or need. "It's a widespread practice in the used-car industry," says Paul Richard, executive director of the Institute of Consumer Financial Education in San Diego.

Common add-ons — loan application fees, warranties, credit insurance and tow insurance — serve only to profit the dealer. "In most cases, the dealer gets to keep half or three-quarters of the premium on these products," says Richard. You can avoid getting ripped off by asking the dealer to detail all charges before you sign for the loan. Then, reject everything beyond the original negotiated price of the vehicle.

5. "Repaying your loan faster will cost you."
Soon after you close a loan, you'll likely get a letter from your lender offering a new payment plan. The claim: You can save thousands in interest by sending half your monthly loan payment every two weeks. You'll just need to pay a third-party program provider an upfront fee (typically $300) and then $5 every two weeks.

Tempted? Lots of people are. In fact, Paymap, the largest provider of such services (it offers its program through lenders such as Chase, Wells Fargo and Citi Mortgage), says more than 622,000 borrowers are currently enrolled in its Equity Accelerator plan, twice as many as in 1997.

But here's the real deal behind these plans: Payments are applied to your loan only once a month. The only reason you save interest is because the biweekly payment forces you to make the equivalent of one extra monthly payment every 12 months. You could save just as much by making that extra payment yourself — and your bank won't charge you a fee.

Jon Leon Guerrero, Paymap's corporate training and development specialist, concedes that biweekly payments have no advantage over an extra annual payment. "But only 3% of mortgage holders across the country make extra payments on their own," he says. "Our program helps people who wouldn't pay off their loan any faster if left to their own devices."