Save Hundreds by
Canceling Mortgage Insurance | Saving
for Retirement | New Rules
About Living Trusts |
Protecting Your
Money Through Estate Planning |
Finding the Best Home Mortgage
| Federal
Laws Which Protect Consumers Financial Rights
If you make a down payment on home
of less than 20% you are often required by lenders to obtain Private
Mortgage Insurance (PMI). This secures the loan for the lenders but is an
additional payment burden for the homeowner. Previously lenders were not
required to cancel the insurance even if the payments eventually exceeded
the 20% mark. However the Homeowners Protection Act, which went into effect
in 1999 stipulates that the lender must automatically cancel the PMI once
the minimum is reached. However this only effects loans signed after July
29, 1999.
You can save Hundreds each year
If you signed your mortgage before
July 29, 1999, you can ask to have the PMI canceled once you exceed 20
percent equity in your home. But federal law does not require your lender or
mortgage service to cancel the insurance.
On a $100,000 loan with 10 percent down ($10,000), PMI might cost you $40 a
month. If you can cancel the PMI, you can save $480 a year and many
thousands of dollars over the loan. Check your annual escrow account
statement or call your lender to find out exactly how much PMI is costing
you each year.
Additional provisions in the law
New borrowers covered by the law
must be told - at closing and once a year - about PMI termination and
cancellation. Mortgage services must provide a telephone number for all
their mortgage borrowers to call for information about termination and
cancellation of PMI. Even though the law's termination and cancellation
rights do not cover loans that were signed before July 29, 1999, or loans
with lender-paid PMI signed on any date, lenders or mortgage services must
tell borrowers about the termination or cancellation rights they may
otherwise have under those loans (such as rights established by the contract
or state law). Next Steps
Some states may have laws that apply to early termination or cancellation of
PMI - even if you signed your mortgage before July 29, 1999. Call your state
consumer protection agency for more information about your state's rules.
Fannie Mae and Freddie Mac, which buy home mortgages from lenders, also may
have guidelines affecting termination or cancellation of PMI on home
mortgages signed before July 29, 1999. Check with your lender or mortgage
service, or call Fannie Mae or Freddie Mac, for more information.
Contact your lender or mortgage service to learn whether you're paying PMI.
If you are, ask how and when it can be terminated or canceled.
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Unfortunately the time that we
should begin thinking about retirement is the time when we care about it
least. Nonetheless, it eventually comes to all of us whether we are ready or
not. The Federal Insurance Deposit Corp. has issued the following tips on
preparing for that day.
Saving for Retirement: A Job You
Should Take Seriously
Most people don't save enough to
retire comfortably. Here are our latest tips.
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Everyone hopes to lead an active,
independent, worry-free life in retirement. But achieving these dreams
takes money, and one message comes across loud and clear in research
studies and forums on retirement savings: Most Americans are NOT saving
enough for their retirement.
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Many authorities suggest that in
your retirement years you need 70 to 80 percent of your pre-retirement
income just to maintain your current lifestyle. But too many Americans,
including large percentages of people in their 40s and 50s, have saved
little or nothing for their retirement.
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"Experts say that time is running
out for many Baby Boomers who will soon reach retirement age," adds Don
Blandin, president of the American Savings Education Council (ASEC), a
Washington-based coalition of private- and public-sector institutions. "If
they do not dramatically change their spending, saving, and investing
habits, millions of Boomers will face financial hardships in what are
supposed to be the best years of their lives."
The need for more retirement savings
has been highlighted recently as stock market losses and lower yields on
savings accounts have cut into many families' retirement programs. That's
why we are offering this latest summary of tips to help you build and
protect your nest egg.
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Make saving for retirement a
priority. Start by figuring out how much you need to set aside, perhaps by
using one of the many interactive worksheets available on personal finance
Web sites (one being the ASEC's "Ballpark Estimate"). Among the other
steps you should consider: Contribute as much as you can to 401(k) savings
programs at work and Individual Retirement Accounts (IRAs) through your
bank or brokerage firm. Arrange for automatic, direct deposit of funds
into 401(k)s and IRAs. Also, plan to increase your retirement savings with
each pay raise.
The sooner you start saving for retirement, the more money you'll have
because of the compounding of interest year after year. Sachie Tanaka, an
FDIC community affairs specialist, provides this example: Two people want
to have $1 million in retirement savings by age 60. One starts saving at
age 20, the other at age 40. Assuming a five-percent interest rate that's
compounded daily, the 20 year-old needs to set aside $651 a month to reach
the million-dollar goal, but the 40 year-old must do a lot of catching up
by saving about $2,422 each month.
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Diversify among a mix of
investments. The news media has been filled recently with stories about
thousands of Enron employees who loaded their 401(k) retirement accounts
with the company's stock and then saw their savings disintegrate when
Enron filed for bankruptcy and the stock's value plummeted.
Experts suggest a mix of investments and savings programs, typically
including IRAs and Keogh accounts (for the self-employed); 401(k)s and
pensions offered by employers; bank certificates of deposit (CDs); a good
variety of stocks and bonds (individual or in mutual funds); and real
estate. If you're in your 20s or 30s, and depending on your tolerance for
risk, you probably can afford to be moderately aggressive with your
investments. If you're in your early 60s and close to retirement, you'll
want to be more conservative, with more in CDs and bonds and less in
stocks or stock mutual funds than you had in the past.
Also, make sure you have enough life, health and disability insurance,
which are investments that can protect your family's finances from a major
setback.
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Take advantage of the tax breaks.
Try to contribute all you can to 401(k)s because the earnings are
tax-deferred, certain contributions may reduce your taxable income, and
many employers even add money to your account as an extra incentive. Also,
the Economic Growth and Tax Relief Reconciliation Act of 2001 includes
special incentives for putting more money into IRAs, 401(k) plans and
other retirement programs. For example, contribution limits for
traditional IRAs and the relatively new Roth IRAs (where the earnings may
be tax-free) are rising from $2,000 last year to $3,000 this year, $4,000
in 2005, and $5,000 in 2008.
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Give your retirement accounts a
periodic checkup. Monitor your retirement accounts at least once or twice
a year. Perhaps you'll want to "rebalance" your portfolio if, because of
market fluctuations, your holdings have become too heavy or too light in a
certain type of investment. Or, maybe you'll decide to increase your
retirement contributions if the accounts aren't growing as you expected.
Review your "Personal Earnings and Benefit Statement" from the Social
Security Administration, which is mailed automatically each year to
current and former workers aged 25 or older and is otherwise available
upon request. The statement shows your lifetime earnings and an estimate
of your Social Security benefits. Among the things to look for: possible
mistakes in your earnings report that can reduce your retirement benefits
in the future. Also, contact current and former employers about your
pension benefits and try to resolve any problems as soon as possible.
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Plan a strategy for when and how
to tap your retirement funds. It's important to know when you are eligible
to withdraw from retirement savings and collect Social Security benefits,
how much you can withdraw and collect, and the tax implications. This kind
of information can help you make smart decisions about such matters as
where to put most of your retirement savings and when you can expect to
retire.
For example, new IRS rules substantially reduce the minimum amount you
must withdraw each year from a traditional IRA, 401(k) and certain other
retirement savings plans after age 70 ½. That's a money-saving change for
many consumers because it means you can keep more money growing longer
tax-deferred, says FDIC tax specialist Rick Cywinski. But he also notes
that, because some people don't take as much from their retirement savings
as the law requires, the IRS has adopted new procedures to more closely
monitor retirement account distributions each year. That's also important,
Cywinski says, "because the penalty for not taking minimum withdrawals
after age 70 ½ is huge—50 percent of what you were supposed to take out
but didn't."
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Professional financial advisors
can be helpful, but choose one carefully. Many professionals (perhaps even
your banker, broker, accountant or insurance agent) call themselves
"financial planners" even though their qualifications and services may
differ significantly. Start your search by asking family or friends to
recommend a reliable professional. "Try to find someone knowledgeable and
reputable—someone who will take the time to make recommendations that are
suitable for your needs," says Ed Silberhorn, an FDIC consumer affairs
specialist.
The Securities and Exchange Commission also says that before you hire any
financial professional, you should know what services you're paying for,
how much those services cost, and how the advisor or planner gets paid.
Example: Some financial planners only charge for their advice—they do not
get paid more if you purchase the financial products they recommend. Other
financial planners, though, may earn commissions if you purchase products
they suggest.
Try to interview more than one planner and ask for a written description
of the services offered. And, independently check the credentials and
reputation of a prospective investment advisor. A good place to begin is
your state government's consumer protection office or state Attorney
General's office, as listed in your phone book.
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Know if your retirement deposits
are fully insured by the FDIC. You don't have to worry if you have less
than $100,000 in retirement funds at the same bank—it is all federally
insured. But if you've got more than $100,000 in retirement accounts at
the same bank, some of your money may be uninsured.
In general, your IRAs and any other "self-directed" retirement deposits at
the same FDIC-insured institution are added together and insured up to
$100,000. (Self-directed means that you, not your employer, decide where
to place the money.) IRAs and other self-directed retirement funds,
however, are insured separately from other types of deposits you have at
the same institution, including pension funds deposited by your employer
(and not self-directed).
For more information, check www.fdic.gov.
Federal Government Help for Your
Golden Years
The FDIC and other federal banking
agencies can answer questions about retirement accounts and your rights. The
FDIC also can help you understand how retirement accounts at banks and
savings institutions are insured.
The Internal Revenue Service can assist with tax-related questions about
your retirement savings, such as when you can withdraw funds from a
retirement account without a penalty. Call toll-free (800) 829-1040 or check
the Web site.
The Social Security Administration can provide information about your Social
Security benefits or about how to file a benefit claim. Call toll-free at
(800) 772-1213 or go to the Web site.
The Pension and Welfare Benefits Administration, part of the U.S. Department
of Labor, responds to inquiries about pension rights and publishes brochures
about retirement savings. Call toll-free (866) 275-7922 or go to the Web
site.
The Federal Consumer Information Center is a clearinghouse for free and
low-cost booklets published by various federal agencies. For a free catalog,
call toll-free (888) 878-3256. Or, read or order the publications online.
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The FDIC recently adopted new rules
that simplify the insurance coverage of deposits held by living trusts (see
Living Trust Accounts). The new rules, which took effect on April 1, 2004,
are simpler than the existing rules and help depositors and bankers
determine insurance coverage more easily.
What the new rules mean
Under the new rules, the FDIC will
provide insurance coverage for payable-on-death (see Payable-on-Death
Accounts) and living trust accounts combined for up to $100,000 for each
qualifying beneficiary even if the living trust contains conditions on the
inheritance, such as a requirement that a beneficiary must graduate from
college before receiving any money. This is an important change because the
old FDIC rules imposed limits on the insurance coverage if the trust
contained such conditions, and that distinction was a source of confusion
for both consumers and bankers. "This simplification of the rules will make
it much more likely that families with living trust accounts will be fully
protected by the FDIC if their bank fails," says FDIC Chairman Don Powell.
In addition, Martin Becker, a senior official in the FDIC division that
handles bank failures, says that "the new rules should speed up deposit
insurance determinations on living trusts and, therefore, enable these
depositors to obtain their insured funds more quickly."
The new rules also eliminate a previous requirement that beneficiaries of
living trust accounts be named in the bank's records. This means that banks
no longer have to keep copies of the depositor's living trust document.
However, the account title must indicate that the funds are held by a living
trust.
For more information, go to the FDIC Web site or contact the FDIC. For
example, the FDIC has issued a fact sheet with examples of how different
kinds of living trust accounts would be insured under the new rules
(available at
www.fdic.gov/news/news/financial/2004/fil1404b.html
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How to pass funds on to your heirs
and make sure you're fully covered by federal deposit insurance, including
new rules for "living trust" accounts.
There are many reasons you've worked hard and saved money
all these years, and one motivating factor is likely to be a desire to
provide for your loved ones after you die. But have you given much thought
to the best ways to pass along your built-up savings and other assets to
your heirs? There's a term for the process of organizing your financial
affairs so that your money, property and other assets can go to your heirs
with a minimum of costs, taxes and hassles. It's called "estate planning."
For many of us, that probably means making and periodically updating a will.
However, there are many different ways to help preserve assets for your
heirs — trusts (specific arrangements for setting money or property aside
for the benefit of another person), bank accounts, investments and so on —
each with its own pros, cons and costs.
FDIC Consumer News can't advise you on what method of estate planning is
best for you — that's more appropriate for an accountant, lawyer, financial
planner or other advisor who is experienced in estate tax issues and estate
planning. But we can help you think more about how you can use FDIC-insured
deposit accounts to achieve your estate-planning goals. We also can help you
understand how these different options are protected by the FDIC, including
new, simpler rules for the insurance coverage of deposits held by a "living
trust."
Why is FDIC insurance coverage an important factor to consider in your
estate planning? If you are like most people who have saved for your
retirement or your heirs, you are concerned about the safety of your money.
That's one of the main reasons many seniors and other people put significant
sums in FDIC-insured deposits. Regrettably, some depositors in recently
failed banks were retired people who thought they were fully covered by FDIC
insurance until their bank failed and they got the disturbing news that some
of their money was over the federal insurance limit.
To help you better understand how bank deposits may be used to pass
savings on to your heirs and how FDIC coverage works, here's an overview.
Payable-on-Death (POD) Accounts:
These accounts, sometimes called
testamentary, Totten trust or in-trust-for accounts, can be set up at a
banking institution with a simple, written declaration from you (usually on
the "signature card" in the bank's records) that the funds will belong to
one or more named beneficiaries upon your death. If properly titled, a
traditional certificate of deposit (CD), other savings account or even a
checking account can be set up as a POD account.
POD accounts and living trusts are both types of "revocable" trust accounts,
which are relatively flexible types of trust accounts in which the depositor
retains the right to revoke the trust. "The word 'trust' suggests there are
limits on your use of the money, but there are no real limits," says FDIC
attorney Christopher Hencke. "The money is still yours to spend, save or
invest, and you can even change your mind about who should inherit the
funds."
Perhaps the biggest reason people establish POD accounts (and other accounts
described in this article) is that, upon the death of the owner, the assets
often can pass to loved ones without going through probate, which is the
process of distributing your assets through an estate administrator.
Avoiding probate can minimize delays, legal expenses or other potential
problems (such as a contested will) in transferring assets to heirs.
Depending on your state's laws, though, it's possible that a POD account may
still be subject to the requirements in your will and probate proceedings.
Also, a POD account, unlike a living trust and certain other trusts, is
simple and easy to establish, and there's no need to pay an attorney to draw
up a formal trust document. "The simplicity of the payable-on-death account
makes it the most common type of revocable trust account," says FDIC
attorney Joe DiNuzzo. "A POD account has no trust agreement — the only
documentation is the bank signature card on which the owner designates the
beneficiaries."
Yet another attraction of a POD account (as well as a living trust) is that,
in most cases, the FDIC's rules provide additional insurance coverage beyond
the basic type of bank account. Here's how. Even though the depositor is
recognized as the owner of the funds, the FDIC insures POD and other
revocable trust accounts (including living trusts) up to $100,000 for each
"qualifying" beneficiary ($200,000 if there are two qualifying
beneficiaries, $300,000 if there are three, and so on). Which beneficiaries
qualify? Under the FDIC's rules, they are a depositor's spouse, child,
grandchild, parent or sibling. Stepparents, stepchildren, adopted children
and similar relationships also qualify.
What happens if you name a non-qualifying beneficiary, such as a niece,
nephew, cousin, in-law, friend or charitable organization? The portion
payable to a non-qualifying beneficiary would be added to any accounts you
have at the bank in the single (or individual) account category and that
total will be insured to $100,000. Example: A $200,000 POD account naming
the owner's two nieces as the beneficiaries would not be insured in the
revocable trust category. Instead, the $200,000 would be insured as the
depositor's single-ownership funds. The $200,000 would be added to any other
single-ownership funds the depositor has at the bank and the total would be
insured for $100,000.
If a POD account is owned by two people, FDIC insurance will be determined
as if each co-owner had a separate account. This means if two parents have a
joint POD account naming their three children as beneficiaries, it would be
insured up to $600,000 (with $300,000 assigned to each parent).
These revocable trust accounts also are separately insured from any other
accounts (individual, joint, retirement) that a depositor has at the same
institution. But be aware that the POD accounts and other revocable trust
accounts you have at one institution, including any living trust accounts,
are added together for FDIC insurance purposes and covered up to $100,000
per qualifying beneficiary. For example, if a father has a POD account
naming his son and daughter as beneficiaries and he also has a living trust
account naming the same beneficiaries, the funds in both accounts would be
added together and the total insured up to $200,000 ($100,000 for each
qualifying beneficiary).
Living Trust Accounts:
As mentioned, a living trust account
is comparable to a POD account in that you still have control over the money
and the assets will transfer directly to the beneficiaries instead of going
through probate. However, a living trust account is very different from a
simple POD account in that the money is deposited in connection with a
formal, legal document typically called a living trust or a family trust and
drafted by an attorney.
Among the potential benefits of a living trust over, say, a POD account: It
can be useful if you want to make sure that a particular beneficiary does
not get unconditional control over your funds. For example, many people
specify in living trusts that the bank deposit (or other property or assets)
will pass to the named beneficiaries only when they reach a certain age or
graduate from college. A living trust also can cover a variety of assets,
not just bank accounts. And if you become ill and incapacitated, a living
trust can allow someone else to manage your financial affairs.
However, experts warn that living trusts are not for everyone. Paying to
draw up a living trust could cost hundreds or thousands of dollars, and
sometimes the potential benefits may not outweigh the costs, especially
depending on your state's inheritance laws and your financial situation.
According to the Federal Trade Commission (FTC), "for some people, a living
trust can be a useful and practical tool, but for others, it can be a waste
of money and time."
The FTC also has warned that some people and businesses have exaggerated or
misrepresented the benefits of living trusts, often in advertisements or
seminars, to sell trusts or other products to people who don't need them.
"Misinformation and misunderstanding about estate taxes and the length or
complexity of probate provide the perfect cover for scam artists who have
created an industry out of older people's fears that their estates could be
eaten up by costs or that the distribution of their assets could be delayed
for years," the FTC says. (See Living Trust Offers: How to Make Sure They're
Trust-worthy at www.fdic.org or call
toll-free 877-382-4357.)
Under the FDIC's rules, living trust accounts are insured the same as POD
accounts — both types of accounts will be combined and insured for up to
$100,000 for each qualifying beneficiary.
While the insurance rules for living trust accounts recently were simplified
(see "New Insurance Rules for Living Trusts"), depositors still need to be
careful. "That's because living trusts often contain provisions tailored to
the owner's specific needs and desires about how the trust assets will be
distributed upon his or her death," says Kathleen Nagle, a supervisor with
the FDIC's Division of Supervision and Consumer Protection. "The terms of
the trust can affect the insurance coverage, so it's important to understand
how the FDIC's rules would apply to a particular living trust account."
For example, she says, some living trusts name "primary" beneficiaries who
will inherit the trust assets when an owner dies as well as "secondary"
beneficiaries in case a primary beneficiary dies before the owner passes
away. Under the FDIC insurance rules, coverage is provided only for those
qualifying beneficiaries who would be entitled to receive the trust's assets
when the owner dies (generally the primary beneficiaries). Unless a primary
beneficiary were to die before the owner passes away, no coverage would be
provided for any secondary beneficiaries.
It also is important to note that FDIC insurance coverage "is based on the
actual interest of each qualifying beneficiary in the living trust account,"
adds FDIC attorney DiNuzzo. "This means that if the beneficiaries have
unequal interests in the trust — say, 50 percent of the assets are to go to
the owner's spouse and 25 percent to each of his children — the FDIC will
apply the $100,000 limit to each beneficiary's share." Also, as with POD
accounts, any living trust deposits for non-qualifying beneficiaries (such
as a cousin or nephew) would be insured with the depositor's individual
accounts, not on a $100,000-per-beneficiary basis.
Joint Accounts:
These are deposit accounts —
checking, savings or CDs — jointly owned by two or more people. A joint
account indicating a "right of survivorship" allows the funds in the account
to pass to the surviving co-owner without going through probate when one of
the co-owners dies. With a joint account, the owners have access to the
funds in an emergency or, for that matter, at any time.
In addition, each person's share in all joint accounts at an institution is
protected by FDIC insurance up to $100,000. So, if two people own a joint
account, and they had no other joint accounts at the same bank, that account
would be FDIC-insured up to $200,000 ($100,000 for each owner), separately
from other accounts (single accounts, PODs and so on) at the same bank. Note
that to qualify for this coverage, every co-owner must have equal rights to
withdraw funds and must sign the account's signature card at the bank
(unless the account is a CD).
On the other hand, some people may not want to give joint ownership of funds
to another person, no matter what the insurance benefits may be. "We always
caution people not to open up joint accounts with others just to qualify for
additional insurance coverage," says Nagle. "You need to remember that by
establishing a joint account with another person, you are giving him or her
equal ownership of the funds. This other person will have as much right to
the money as you do, and you shouldn't take that fact lightly."
Retirement Accounts:
Thanks in part to Individual
Retirement Accounts (IRAs), Keogh accounts (for the self-employed),
employer-sponsored pension or profit-sharing plans, "401(k)" accounts and
other vehicles that help Americans save for their golden years, it's
possible to gradually accumulate a fairly large sum of money to pass along
to your heirs. In general, you can expect that retirement funds you
designate for beneficiaries will pass to those heirs without going through
probate.
Under the FDIC's rules, your IRA and self-directed Keogh deposits (those
over which you have control) at the same bank are added together and insured
up to $100,000. Employee benefit-plan accounts (pension plans and profit
sharing) at the same bank are typically insured separately from IRA and
Keogh funds. In addition, these retirement accounts are insured separately
from your funds in other types of deposit accounts, such as individual,
joint and POD accounts.
But remember this: Retirement accounts — unlike POD and living trust
accounts — do not qualify for extra coverage by adding additional
beneficiaries. Insurance is capped at $100,000 per owner. To get more
insurance for your retirement money, you'd need to divide the money among
different insured institutions.
Final Thoughts
If you or your family has $100,000
or less in all your deposit accounts at the same insured institution, you
don't have to worry — you're fully protected. But if you have funds at one
institution totaling more than $100,000, you'd be smart to understand how to
protect yourself with FDIC insurance. For example, each person's deposits in
different ownership categories — single, joint, retirement, revocable trust
(POD and living trust) accounts — at the same institution are each
separately insured to $100,000. That means you could have far more than
$100,000 at one insured institution and still be fully protected.
Also be aware that a change in your family's situation, such as a divorce or
the death of an account owner or beneficiary, could significantly increase
or, more often, decrease the amount of your FDIC insurance coverage.
The FDIC can help you understand your coverage and get the peace of mind
you're looking for from deposit insurance. To read or learn more about FDIC
coverage, see "For More
Information about FDIC Insurance".
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Shopping around for a home loan or
mortgage will help you to get the best financing deal. A mortgage—whether
it's a home purchase, a refinancing, or a home equity loan—is a product,
just like a car, so the price and terms may be negotiable. You'll want to
compare all the costs involved in obtaining a mortgage. Shopping, comparing,
and negotiating may save you thousands of dollars.
Obtain Information from Several
Lenders
Home loans are available from
several types of lenders—thrift institutions, commercial banks, mortgage
companies, and credit unions. Different lenders may quote you different
prices, so you should contact several lenders to make sure you're getting
the best price. You can also get a home loan through a mortgage broker.
Brokers arrange transactions rather than lending money directly; in other
words, they find a lender for you. A broker's access to several lenders can
mean a wider selection of loan products and terms from which you can choose.
Brokers will generally contact several lenders regarding your application,
but they are not obligated to find the best deal for you unless they have
contracted with you to act as your agent. Consequently, you should consider
contacting more than one broker, just as you should with banks or thrift
institutions.
Whether you are dealing with a lender or a broker may not always be clear.
Some financial institutions operate as both lenders and brokers. And most
brokers' advertisements do not use the word "broker." Therefore, be sure to
ask whether a broker is involved. This information is important because
brokers are usually paid a fee for their services that may be separate from
and in addition to the lender's origination or other fees. A broker's
compensation may be in the form of "points" paid at closing or as an add-on
to your interest rate, or both. You should ask each broker you work with how
he or she will be compensated so that you can compare the different fees. Be
prepared to negotiate with the brokers as well as the lenders.
Obtain All Important Cost
Information
Be sure to get information about
mortgages from several lenders or brokers. Know how much of a down payment
you can afford, and find out all the costs involved in the loan. Knowing
just the amount of the monthly payment or the interest rate is not enough.
Ask for information about the same loan amount, loan term, and type of loan
so that you can compare the information. The following information is
important to get from each lender and broker:
Rates
Ask each lender and broker for a
list of its current mortgage interest rates and whether the rates being
quoted are the lowest for that day or week. Ask whether the rate is fixed or
adjustable. Keep in mind that when interest rates for adjustable-rate loans
go up, generally so does the monthly payment. If the rate quoted is for an
adjustable-rate loan, ask how your rate and loan payment will vary,
including whether your loan payment will be reduced when rates go down. Ask
about the loan's annual percentage rate (APR). The APR takes into account
not only the interest rate but also points, broker fees, and certain other
credit charges that you may be required to pay, expressed as a yearly rate.
Points
Points are fees paid to the lender
or broker for the loan and are often linked to the interest rate; usually
the more points you pay, the lower the rate.
Check your local newspaper for information about rates and points currently
being offered. Ask for points to be quoted to you as a dollar amount—rather
than just as the number of points—so that you will actually know how much
you will have to pay.
Fees
A home loan often involves many
fees, such as loan origination or underwriting fees, broker fees, and
transaction, settlement, and closing costs. Every lender or broker should be
able to give you an estimate of its fees. Many of these fees are negotiable.
Some fees are paid when you apply for a loan (such as application and
appraisal fees), and others are paid at closing. In some cases, you can
borrow the money needed to pay these fees, but doing so will increase your
loan amount and total costs. "No cost" loans are sometimes available, but
they usually involve higher rates.
Ask what each fee includes. Several items may be lumped into one fee.
Ask for an explanation of any fee you do not understand. Some common fees
associated with a home loan closing are listed on the Mortgage Shopping
Worksheet in this brochure.
Down Payments and Private
Mortgage Insurance
Some lenders require 20 percent of
the home's purchase price as a down payment. However, many lenders now offer
loans that require less than 20 percent down—sometimes as little as 5
percent on conventional loans. If a 20 percent down payment is not made,
lenders usually require the home buyer to purchase private mortgage
insurance (PMI) to protect the lender in case the home buyer fails to pay.
When government-assisted programs such as FHA (Federal Housing
Administration), VA (Veterans Administration), or Rural Development Services
are available, the down payment requirements may be substantially smaller.
Ask about the lender's requirements for a down payment, including what you
need to do to verify that funds for your down payment are available. Ask
your lender about special programs it may offer. If PMI is required for your
loan,
Ask what the total cost of the insurance will be. Ask how much your monthly
payment will be when including the PMI premium. Ask how long you will be
required to carry PMI.
Obtain the Best Deal That You
Can
Once you know what each lender has
to offer, negotiate for the best deal that you can. On any given day,
lenders and brokers may offer different prices for the same loan terms to
different consumers, even if those consumers have the same loan
qualifications. The most likely reason for this difference in price is that
loan officers and brokers are often allowed to keep some or all of this
difference as extra compensation. Generally, the difference between the
lowest available price for a loan product and any higher price that the
borrower agrees to pay is an overage. When overages occur, they are built
into the prices quoted to consumers. They can occur in both fixed and
variable-rate loans and can be in the form of points, fees, or the interest
rate. Whether quoted to you by a loan officer or a broker, the price of any
loan may contain overages.
Have the lender or broker write down all the costs associated with the loan.
Then ask if the lender or broker will waive or reduce one or more of its
fees or agree to a lower rate or fewer points. You'll want to make sure that
the lender or broker is not agreeing to lower one fee while raising another
or to lower the rate while raising points. There's no harm in asking lenders
or brokers if they can give better terms than the original ones they quoted
or than those you have found elsewhere.
Once you are satisfied with the terms you have negotiated, you may want to
obtain a written lock-in from the lender or broker. The lock-in should
include the rate that you have agreed upon, the period the lock-in lasts,
and the number of points to be paid. A fee may be charged for locking in the
loan rate. This fee may be refundable at closing. Lock-ins can protect you
from rate increases while your loan is being processed; if rates fall,
however, you could end up with a less favorable rate. Should that happen,
try to negotiate a compromise with the lender or broker.
Remember: Shop, Compare,
Negotiate
When buying a home, remember to shop
around, to compare costs and terms, and to negotiate for the best deal. Your
local newspaper and the Internet are good places to start shopping for a
loan. You can usually find information both on interest rates and on points
for several lenders. Since rates and points can change daily, you'll want to
check your newspaper often when shopping for a home loan. But the newspaper
does not list the fees, so be sure to ask the lenders about them.
The Mortgage Shopping Worksheet that follows may also help you. Take it with
you when you speak to each lender or broker and write down the information
you obtain. Don't be afraid to make lenders and brokers compete with each
other for your business by letting them know that you are shopping for the
best deal.
Fair Lending Is Required by
Law
The Equal Credit Opportunity Act
prohibits lenders from discriminating against credit applicants in any
aspect of a credit transaction on the basis of race, color, religion,
national origin, sex, marital status, age, whether all or part of the
applicant's income comes from a public assistance program, or whether the
applicant has in good faith exercised a right under the Consumer Credit
Protection Act.
The Fair Housing Act prohibits discrimination in residential real estate
transactions on the basis of race, color, religion, sex, handicap, familial
status, or national origin.
Under these laws, a consumer cannot be refused a loan based on these
characteristics nor be charged more for a loan or offered less favorable
terms based on such characteristics.
Credit Problems? Still Shop,
Compare, and Negotiate
Don't assume that minor credit
problems or difficulties stemming from unique circumstances, such as illness
or temporary loss of income, will limit your loan choices to only high-cost
lenders.
If your credit report contains negative information that is accurate, but
there are good reasons for trusting you to repay a loan, be sure to explain
your situation to the lender or broker. If your credit problems cannot be
explained, you will probably have to pay more than borrowers who have good
credit histories. But don't assume that the only way to get credit is to pay
a high price. Ask how your past credit history affects the price of your
loan and what you would need to do to get a better price. Take the time to
shop around and negotiate the best deal that you can.
Whether you have credit problems or not, it's a good idea to review your
credit report for accuracy and completeness before you apply for a loan. To
order a copy of your credit report, contact:
Equifax: (800) 685-1111
TransUnion: (800) 916-8800
Experian: (888) EXPERIAN (397-3742)
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The financial rights of consumers
are protected by federal and state laws and regulations covering many
services offered by financial institutions. The following list of
regulations apply to the financial arena including banks, savings and loan
associations, and credit unions.
Federal Laws
Adjustable-Rate Mortgage
Loans
Adjustable-rate mortgage loans are
covered by regulations that require, at a minimum, disclosure of the
circumstances under which the rate may increase, any limitations on the
increase, the effects of an increase and an example of the payment terms
that would result from an increase.
Community Reinvestment Act
The Community Reinvestment Act
requires federal agencies to encourage depository financial institutions to
help meet the credit needs of their communities, including low- and
moderate- income neighborhoods. The regulatory agencies assess the
institutions' records of meeting those credit needs by preparing a written
evaluation of the institutions and assigning a rating with facts supporting
the conclusions. Such ratings shall be disclosed to the public for
examinations beginning July 1, 1990. The Act also requires regulatory
agencies to consider an institution's record of helping to meet community
credit needs when evaluating certain corporate applications, such as
permission to establish a branch, to relocate a branch or home office, or to
merge.
Consumer Leasing Act
The Consumer Leasing Act requires
disclosure of information that helps consumers compare the cost and terms of
various leases and the cost and terms of buying on credit versus cash. The
Act does not apply to real estate leases or to leases of four months or
less.
Credit Practices Rule
The Credit Practices Rule prohibits
lenders from using certain remedies, such as confessions of judgment; wage
assignments; and nonpossessory, nonpurchase money, security interests in
household goods. The rule also prohibits lenders from misrepresenting a
cosigner's liability and requires that lenders provide cosigners with a
notice explaining their credit obligation as a cosigner. It also prohibits
the pyramiding of late charges.
Electronic Fund Transfer Act
The Electronic Fund Transfer Act
provides consumer protection for all transactions using a debit card or
electronic means to debit or credit an account. It also limits a consumer's
liability for unauthorized electronic fund transfers.
Equal Credit Opportunity Act
The Equal Credit Opportunity Act
prohibits discrimination against an applicant for credit because of age,
sex, marital status, religion, race, color, national origin, or receipt of
public assistance. It also prohibits discrimination because of a good faith
exercise of any rights under the federal consumer credit laws. If a consumer
has been denied credit, the law requires notification of the denial in
writing. The consumer may request, within 60 days, that the reason for
denial be provided in writing.
Expedited Funds Availability Act
The Expedited Funds Availability Act
requires all banks, savings and loan associations, savings banks, and credit
unions to make funds deposited into checking, share draft and NOW accounts
available according to specified time schedules and to disclose their funds
availability policies to their customers. The law does not require an
institution to delay the customer's use of deposited funds but instead
limits how long any delay may last. The regulation also establishes rules
designed to speed the return of unpaid checks.
Fair Credit and Charge Card Disclosure Act
The Fair Credit and Charge Card
Disclosure Act requires new disclosures on credit and charge cards, whether
issued by financial institutions, retail stores or private companies.
Information such as APRs, annual fees and grace periods must be provided in
tabular form along with applications and preapproved solicitations for
cards. The regulations also require card issuers that impose an annual fee
to provide disclosures before annual renewal. Card issuers that offer credit
insurance must inform customers of any increase in rate or substantial
decrease in coverage should the issuer decide to change insurance providers.
Fair Credit Billing Act
The Fair Credit Billing Act
establishes procedures for the prompt correction of errors on open-end
credit accounts. It also protects a consumer's credit rating while the
consumer is settling a dispute.
Fair Credit Reporting Act
The Fair Credit Reporting Act
establishes procedures for correcting mistakes on a person's credit record
and requires that a consumer's record only be provided for legitimate
business needs. It also requires that the record be kept confidential. A
credit record may be retained seven years for judgments, liens, suits, and
other adverse information except for bankruptcies, which may be retained ten
years. If a consumer has been denied credit, a cost-free credit report may
be requested within 30 days of denial.
Fair Debt Collection Practices Act
The Fair Debt Collection Practices
Act is designed to eliminate abusive, deceptive and unfair debt collection
practices. It applies to third party debt collectors or those who use a name
other than their own in collecting consumer debts. Very few commercial
banks, savings banks, savings and loan associations, or credit unions are
covered by this Act, since they usually collect only their own debts.
Complaints concerning debt collection practices should generally be filed
with the Federal Trade Commission.
Fair Housing Act
The Fair Housing Act prohibits
discrimination on the basis of race, color, sex, religion, handicap,
familial status or national origin in the financing, sale or rental of
housing.
The Federal Trade Commission Act
The Federal Trade Commission Act
requires federal financial regulatory agencies to maintain a consumer
affairs division to assist in resolving consumer complaints against
institutions they supervise. This assistance is given to help get necessary
information to consumers about problems they are having in order to address
complaints concerning acts or practices which may be unfair or deceptive.
Home Equity Loan Consumer Protection Act
The Home Equity Loan Consumer
Protection Act requires lenders to disclose terms, rates and conditions
(APRs, miscellaneous charges, payment terms, and information about variable
rate features) for home equity lines of credit with the applications and
before the first transaction under the home equity plan. If the disclosed
terms change, the consumer can refuse to open the plan and is entitled to a
refund of fees paid in connection with the application. The Act also limits
the circumstances under which creditors may terminate or change the terms of
a home equity plan after it is opened.
Home Mortgage Disclosure Act Aggregation
Project
Using loan data collected from each
covered institution, the Federal Financial Institutions Examination Council
(FFIEC) prepares disclosure statements and various reports for individual
institutions in each MSA, showing lending patterns by location, age of
housing stock, income level, sex and racial characteristics. The disclosure
statements and reports are made available to the public at central
depositories located in each MSA. Requests for the list of central
depositories should be forwarded to the FFIEC.
Federal Financial Institutions Examination Council 2100 Pennsylvania Ave, NW
Suite 200 Washington, DC 20037
Home Mortgage Disclosure Act (HMDA)
The Home Mortgage Disclosure Act
(HMDA) requires certain lending institutions to report annually on their
originations and purchases of home purchase and home improvement loans as
well as applications for such loans. The type of loan, location of the
property, race or national origin, sex and income of the applicant or
borrower is reported. Institutions are required to make information
regarding their lending available to the public and must post a notice of
availability in their public lobby. Disclosure statements are also available
at central depositories in metropolitan areas. This information can help the
public determine how well institutions are serving the housing credit needs
of their neighborhoods and communities.
National Flood Insurance Act
National Flood Insurance is
available to any property holder whose local community participates in the
national program by adopting and enforcing flood plain management. Federally
regulated lenders are required to compel borrowers to purchase flood
insurance in certain designated areas. Lenders also must disclose to
borrowers if their structure is located in a flood hazard area.
Real Estate Settlement Procedures Act
The Real Estate Settlement
Procedures Act requires that a consumer be given advance information about
the services and costs involved in the closing of a residential mortgage. It
also limits the amount that can be collected for mortgage escrow.
Rights to Financial Privacy Act
The Right to Financial Privacy Act
provides that customers of financial institutions have a right to expect
that their financial activities will have a reasonable amount of privacy
from federal government scrutiny. The Act establishes specific procedures
and exemptions concerning the release of the financial records of customers
and imposes limitations on and requirements of financial institutions prior
to the release of such information to the federal government.
Savings and Time Deposits
Savings and time deposits are
covered by regulations that prohibit inaccurate or misleading advertising.
Truth in Lending Act
The Truth in Lending Act requires
disclosure of the "finance charge" and the "annual percentage rate"--and
certain other costs and terms of credit--so that a consumer can compare the
prices of credit from different sources. It also limits liability on lost or
stolen credit cards.
This information was prepared by the Federal Financial Institutions
Examination Council and obtained from the FDIC. For more information contact
the FDIC at www.fdic.gov
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