Every day we see more drama in the foreclosure debacle, with increasing number of lenders being pressured to put them on hold.
But what's the strategy for those of us who are still paying our mortgages and not in danger of losing our homes? This should be a perfect opportunity to take Arianna Huffington's wildly successful "Move Your Money" campaign one step further by "shopping for a lower-cost mortgage" and refinancing with a more responsible lender. This won't just punish those who loaned recklessly and reward those who didn't, i.e., community bankers, it will likely save you big bucks if interest rates have dropped at least two percentage points below the rate you are paying on your mortgage.
In the first seven days alone of the "Move Your Money" campaign which began in December 2009, about 340,000 people searched zip codes to find community banks that are highly rated. More importantly, they also moved big bucks out of big bad banks: according to Dennis Santiago of Institutional Risk Analytics, who created a search engine on the site, more than $1 billion was moved in the first three months of 2010. Finding a bank couldn't be easier. When you go to Move Your Money you simply need to enter your zip code to find a list of sound local banks and credit unions to choose from.
There's a big difference between the Too Big To Fail banks that got bailed out and the Small Banks Who Failed. For one thing, the community banks tried to stop these reckless lending practices while the big banks threw bucks at Congress to try to stop reform, James MacPhee, chairman of the Independent Community Bankers of America (ICBA).
"Along with several ICBA member bankers and staff, I have testified numerous times in the past three years in front of Barney Frank, Chairman of the House Financial Services Committee, and Chris Dodd, Chairman of the Senate Banking committee," MacPhee said. "Conversely, the American Bankers Association and the largest Wall Street firms ran a full court press trying to stop (reform) from ever being passed."
Have community banks failed? Yes, MacPhee maintains, but it wasn't because they were reckless but because their prudent loans were "bundled" with bad loans.
"As these debt instruments became worthless, hose buying our debt stopped purchasing, and foreclosures ran in the tens of thousands. When that occurred, the market value of the solid loans became worth less, as foreclosed homes were being sold well under their market value. As the job market dried up, even good loans had to be written down by the community banks. The resulting loss of capital dropped below regulatory standards, and the banks were closed and then typically merged into other banks by the Federal Deposit Insurance Corporation. "
The good news -- or let's hope so -- is that the exposure of reckless practices will humiliate the bad banks into changing their practices. If it doesn't? All the more reason to "boycott" them and only do business with those who put their customers first.
Ready to consider refinancing? Consider taking these steps.
Before you do any "mortgage shopping," get a copy of your credit history at AnnualCreditReport.com. If you have a low score, you might want to consider postponing refinancing until you've built a better bill-payment history; it could literally cut your mortgage cost in half.
Consider only fixed-rate mortgages. Some "experts" may claim that adjustable rate mortgages are okay if you're only going to stay in your home for three years or less, but your home is not a disposable item like a cell phone. If you're only planning to live in one place for three years or less, you should rent, not buy. MacPhee agrees with me that one of the biggest ripoffs in the banking industry -- that the media STILL isn't covering -- is the adjustable rate mortgage. "If (a bank is) going to write an ARM mortgage because someone cannot afford a home under standard bank rates, who are you kidding? The custom is happy for three years, or the period of the ARM balloon, the bank makes big fees, and then sells off both the credit risk and the interest rate risk and walks away."
As I pointed out in my book, America, Welcome to the Poorhouse, another big bargain is the little-talked about 15-year mortgage. Savings are significant both because the loan features a shorter payback period and because these mortgages generally feature lower rates. For example, assuming a 6% interest rate, your total interest costs on a $100,000 30-year mortgage are nearly $116,000. If that same mortgage were converted to a 15-year term, it would require somewhat higher monthly payments -- $844 instead of $600 -- but you'd save nearly $64,000 in interest payments.
Never take out an interest-only mortgage. While you pay no principal during the interest-only period, your payments will rise when that period comes to an end. Furthermore, the mortgage has to be paid off during a shorter term -- 25, 23, or 20 years -- so your monthly payments will be higher.
Avoid one of the riskiest mortgages, a balloon loan. Talk about bait and switch: typically, after the end of a three- or seven-year period, you owe the bank all the remaining principal, in one lump sum. If the value of your home drops you won't be able to find another mortgage to repay that loan and you risk foreclosure. And let's hope that this option won't even be broached by your responsible community banker.