Robosigners are the new villains of the foreclosure mess: They're the bank employees who signed off on thousands of documents without reviewing them. But banks aren't the only ones speeding through the fine print. Consumers often do the same thing.
That cursory scan leaves many unaware of what they've committed to and -- in the worst case -- ends up costing them thousands more than expected. Dense contracts can include small monthly fees on a car loan, for example, totaling more than $1,400 over the life of a typical loan. Or a buried clause in a mortgage can leave a buyer on the hook for expensive repairs. And a typical sleight of hand with an adjustable rate mortgage could cost you $50,000 or more on a $300,000 loan.
It's hard to blame consumers for not pulling out the magnifying glass: Loan documents are typically long and so full of legalese that few people can understand what they're reading, let alone digest it quickly when a deal is on the line, consumer advocates say. "How can anyone be expected to read every word? It's not possible," says Linda Sherry, director of national priorities at Consumer Action, a consumer advocacy group.
Even so, there's little consumers can do but plough through the documents. "Even though it can be daunting and you may not understand all of the fine print, you are agreeing to the terms when you sign," says Charley Moore, founder of RocketLawyer.com, which helps consumers create legal documents. You can always hire a lawyer to review the documents before you sign them -- and in many real estate deals, it's recommended -- but it's ultimately your responsibility to understand what you sign.
Here's what you need to look for and what to avoid when reviewing contracts before signing up for a home mortgage, car loan or life insurance policy.
Home Mortgage
In a 10-page mortgage note, two terms are particularly important, says Chip Cummings, president of Northwind Financial, a training and consulting company for mortgage firms: a prepayment penalty and the margin rate on adjustable mortgages.
A prepayment penalty -- a fee for paying off a mortgage early -- ranges from 1% to 3% of the total mortgage amount. That's at least an extra $3,000 on a $300,000 mortgage. If you find the clause and weren't told about it, ask to have it removed during the loan application process.
For borrowers with adjustable rate mortgages, there's a bigger issue: overly high margins for lenders. Consumers getting a 5/1 adjustable-rate mortgage -- the most common ARM -- should check how their rate will adjust after the first five years. That adjustment is based in part on the profit the lender makes when it sells your loan to an investor, called the "margin rate," and buyers can find it on the second page of their mortgage note. If the number is higher than 3%, speak up, says Cummings. More reasonable rates are between 2.5% and 3%, and even a one percentage-point difference could add up to more than $50,000 over the life of a $300,000 mortgage.
Closing Paperwork
Even if you wanted to pore over the 40 to 100 pages in the dozen or so documents typically signed at a real estate closing, you likely won't have the chance. The seller, attorneys and other agents aren't exactly keen on waiting patiently while you cross-reference contracts with a legal reference book. To keep it simple, look for fees that don't match original estimates, clauses that make you responsible for defects in a home and tricky tax issues if you're getting any kind of government assistance to buy your home.
To get a jump on the proceedings, ask the settlement agent -- either the title company or the attorney handling the closing -- for a copy of the closing statement, which you're entitled to 24 hours before the closing by federal law. Review all fees, including the mortgage origination, credit report and appraisal fees. If the numbers aren't the same as those quoted in the good-faith estimate you received when applied for the mortgage, insist they revert back at closing.
One item you or your lawyer will have to look for at the closing itself is a "hold harmless agreement." That clause absolves the closing agent, lending company and officer of responsibility of defects in the home, like finding Chinese drywall or mold -- in other words, it places the responsibility for any associated repairs with the buyer. If it's there, ask that it be removed. If the sale isn't a bank foreclosure, the buyer's lawyer can usually do this on the spot, says Robert Lattas, a real estate attorney in Chicago.
And if you're among the 10% of homebuyers who receive down-payment assistance from your state, your closing package will include details about what happens if you sell your home at a profit in the near future, typically less than 10 years. You might need to pay back at least part of the profit -- and you'll learn just how much with closer review.
A Car Loan
Car loan documents can require up to 20 signatures -- even though borrowing for a car is pretty simple. So it's easy to miss small fees and monthly payment oddities, particularly when dealers push every option before you get to the final paperwork.
Look for small unnecessary fees, like an extended warranty, which costs about $20 a month, or special fabric treatments that cost about $4 per month, says Karl Brauer, a senior analyst at Edmunds.com, which tracks car trends. Dealerships will recommend these, especially if you're financing the purchase, and tout their low cost. But add those two fees to a five-year, $10,000 car loan at 5%, and they'll cost you an additional $1,400 in interest over the life of the loan.
Also, compare the promised monthly payment with what's actually in the contract. If you agreed to a "balloon payment," where you make low monthly payments for a few years, then owe a lump sum, usually of several thousand dollars, make sure both payments are in the loan documents, says Brauer. Some dealers might omit the loftier sum.
A Life Insurance Policy
Unlike a car or home loan, consumers can take a few days to review a life insurance policy before signing. Take that time to look for exclusions -- lest the protection end up worthless after you discover your love for extreme paddle-boarding.
The most common life insurance exclusions are certain causes of death. Suicide is almost always excluded during the first few years of the policy, says Scott Simmonds, a Saco, Maine-based insurance consultant. And the company might not pay if the cause of death was an extreme sport, like skydiving, hang gliding or scuba diving. Some companies won't even cover you if you admit to participating in such activities. If that's the case, keep shopping: There are insurers that will cover you, albeit for a higher price, he says. Occasional scuba diving is okay with most insurers, but regular thrill-seekers may find themselves out of luck.
This information on exclusions is listed in the terms and conditions section in the offer of coverage, which is about 10 pages long and will also be spelled out on the last form you sign. Consumers can cancel life insurance policies but will lose the money they've paid into them. ( finance.yahoo.com )
That cursory scan leaves many unaware of what they've committed to and -- in the worst case -- ends up costing them thousands more than expected. Dense contracts can include small monthly fees on a car loan, for example, totaling more than $1,400 over the life of a typical loan. Or a buried clause in a mortgage can leave a buyer on the hook for expensive repairs. And a typical sleight of hand with an adjustable rate mortgage could cost you $50,000 or more on a $300,000 loan.
It's hard to blame consumers for not pulling out the magnifying glass: Loan documents are typically long and so full of legalese that few people can understand what they're reading, let alone digest it quickly when a deal is on the line, consumer advocates say. "How can anyone be expected to read every word? It's not possible," says Linda Sherry, director of national priorities at Consumer Action, a consumer advocacy group.
Even so, there's little consumers can do but plough through the documents. "Even though it can be daunting and you may not understand all of the fine print, you are agreeing to the terms when you sign," says Charley Moore, founder of RocketLawyer.com, which helps consumers create legal documents. You can always hire a lawyer to review the documents before you sign them -- and in many real estate deals, it's recommended -- but it's ultimately your responsibility to understand what you sign.
Here's what you need to look for and what to avoid when reviewing contracts before signing up for a home mortgage, car loan or life insurance policy.
Home Mortgage
In a 10-page mortgage note, two terms are particularly important, says Chip Cummings, president of Northwind Financial, a training and consulting company for mortgage firms: a prepayment penalty and the margin rate on adjustable mortgages.
A prepayment penalty -- a fee for paying off a mortgage early -- ranges from 1% to 3% of the total mortgage amount. That's at least an extra $3,000 on a $300,000 mortgage. If you find the clause and weren't told about it, ask to have it removed during the loan application process.
For borrowers with adjustable rate mortgages, there's a bigger issue: overly high margins for lenders. Consumers getting a 5/1 adjustable-rate mortgage -- the most common ARM -- should check how their rate will adjust after the first five years. That adjustment is based in part on the profit the lender makes when it sells your loan to an investor, called the "margin rate," and buyers can find it on the second page of their mortgage note. If the number is higher than 3%, speak up, says Cummings. More reasonable rates are between 2.5% and 3%, and even a one percentage-point difference could add up to more than $50,000 over the life of a $300,000 mortgage.
Closing Paperwork
Even if you wanted to pore over the 40 to 100 pages in the dozen or so documents typically signed at a real estate closing, you likely won't have the chance. The seller, attorneys and other agents aren't exactly keen on waiting patiently while you cross-reference contracts with a legal reference book. To keep it simple, look for fees that don't match original estimates, clauses that make you responsible for defects in a home and tricky tax issues if you're getting any kind of government assistance to buy your home.
To get a jump on the proceedings, ask the settlement agent -- either the title company or the attorney handling the closing -- for a copy of the closing statement, which you're entitled to 24 hours before the closing by federal law. Review all fees, including the mortgage origination, credit report and appraisal fees. If the numbers aren't the same as those quoted in the good-faith estimate you received when applied for the mortgage, insist they revert back at closing.
One item you or your lawyer will have to look for at the closing itself is a "hold harmless agreement." That clause absolves the closing agent, lending company and officer of responsibility of defects in the home, like finding Chinese drywall or mold -- in other words, it places the responsibility for any associated repairs with the buyer. If it's there, ask that it be removed. If the sale isn't a bank foreclosure, the buyer's lawyer can usually do this on the spot, says Robert Lattas, a real estate attorney in Chicago.
And if you're among the 10% of homebuyers who receive down-payment assistance from your state, your closing package will include details about what happens if you sell your home at a profit in the near future, typically less than 10 years. You might need to pay back at least part of the profit -- and you'll learn just how much with closer review.
A Car Loan
Car loan documents can require up to 20 signatures -- even though borrowing for a car is pretty simple. So it's easy to miss small fees and monthly payment oddities, particularly when dealers push every option before you get to the final paperwork.
Look for small unnecessary fees, like an extended warranty, which costs about $20 a month, or special fabric treatments that cost about $4 per month, says Karl Brauer, a senior analyst at Edmunds.com, which tracks car trends. Dealerships will recommend these, especially if you're financing the purchase, and tout their low cost. But add those two fees to a five-year, $10,000 car loan at 5%, and they'll cost you an additional $1,400 in interest over the life of the loan.
Also, compare the promised monthly payment with what's actually in the contract. If you agreed to a "balloon payment," where you make low monthly payments for a few years, then owe a lump sum, usually of several thousand dollars, make sure both payments are in the loan documents, says Brauer. Some dealers might omit the loftier sum.
A Life Insurance Policy
Unlike a car or home loan, consumers can take a few days to review a life insurance policy before signing. Take that time to look for exclusions -- lest the protection end up worthless after you discover your love for extreme paddle-boarding.
The most common life insurance exclusions are certain causes of death. Suicide is almost always excluded during the first few years of the policy, says Scott Simmonds, a Saco, Maine-based insurance consultant. And the company might not pay if the cause of death was an extreme sport, like skydiving, hang gliding or scuba diving. Some companies won't even cover you if you admit to participating in such activities. If that's the case, keep shopping: There are insurers that will cover you, albeit for a higher price, he says. Occasional scuba diving is okay with most insurers, but regular thrill-seekers may find themselves out of luck.
This information on exclusions is listed in the terms and conditions section in the offer of coverage, which is about 10 pages long and will also be spelled out on the last form you sign. Consumers can cancel life insurance policies but will lose the money they've paid into them. ( finance.yahoo.com )
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