Helping You Avoid Life's Financial Mistakes

Financial Money Traps: The Option Arm Mortgage Disaster

December 22, 2008 By 1 Comment

Today is the financial post in the Financial Money Trap Series of money traps I’ve personal fallen into and originally this was only to be a 2 post series but I felt this last post had to be said.  In the first post I talked about a timeshare trap I fell into, and the second post talks about the credit card traps I’ve fallen into.

Today’s post is about a mortgage trap I fell into.  This trap could have been much worse but I will explain what I did to prevent them from getting any worse than it really was.

The Option Arm Mortgage Trap And How It Works

Of all the different types of mortgages out there you defiantly need to watch out for this one.  Now I’m not saying this is a bad mortgage.  What I am saying is that this is a mortgage for only the most sophisticated people who are can take bigger risk and fully understand how this mortgage works.

The Option Arm Mortgage is unlike any other mortgage out there.  All mortgages have a single payment and an interest rate.  Sounds pretty simple but a Option Arm has an option of 4 different payments you can make on it.

  • The first two payments are the 15 year payment, and a 30 year payment.  Both of which are like paying on a 15 and 30 year loan except the interest rates are variable and can adjust on a monthly basis. 
  • The third payment option is an interest only payment.  On this payment you are only paying the interest and no principle on the actual mortgage.  This payment can adjust monthly as well.
  • The fourth payment is called a minimum payment.  This payment will actually be less than the interest payment.  Though this payment does not usually adjust monthly.  It usually can only adjust around 7.5% per year of the payment not the interest rate .  So if you have a $500 minimum payment the next year the highest the loan could adjust to is $537.50. 

How This Mortgage Was Designed To Work

When I first got the option arm mortgage I learned their was two different ways to use this loan. 

  1. The way lenders prefer you to use this loan is for you to pay either the 30 year or 15 year payment like you normally would but if thing would happen to get tight and couldn’t make those two payments you could pay the interest only payment or if things were very tight you could make the minimum payment. 
  2. The second way to use the option arm loan is to pay either the interest only payment or the minimum payment and save the difference you would be paying on your 30 year or 15 year payment aside into a separate savings account.  Why do this?  So you have easy liquidity on your money just in case you lost your job or had a dire emergency.  Then after saving the extra cash and gaining a little interest on it after 30 years you can take that cash you have saved and pay off the mortgage in full.

The Problem With The Option Arm Mortgage

Sometimes things sound great in theory but in reality they just don’t work.  In the case with the option arm mortgage it couldn’t be more true.  Here’s the problems with this mortgage.

  • You could pay the 30 year or 15 year payment option and only pay the minimum or interest only when you needed to but the issue I’ve seen here is that people will get stuck on paying the interest only or worse the minimum payment and eventually dig a hole so deep that they can’t even pay the 30 or 15 year payment. 
  • In the second way to pay off the mortgage you have to set up a savings account to set the money aside so you can keep your fingers off of it.  However, the problem is that the mortgage lender only does mortgages.  So this pretty much leaves you to figure out where to save the money but 9 times out of 10 you may spend all of the money before you save it.
  • And last but not least the biggest problem is that the minimum payment on the option arm loan is a negative amortization payment.  What this means is that you are paying less than the interest due and therefore add the difference between the interest only and minimum payment to your loan balance.  Yes you heard me right your loan balance will go up.  After 4 years of having this loan I ended up adding $4000 to my loan balance.  What a shock this was.

Have You Been In This Mortgage Trap?

Again this mortgage is not for everyone but more important knowing all the risk involved.  Have you ever been in this type of mortgage before?   Leave a comment and let me know how it worked out for you.

This post was featured on the Carnival of Personal Finance by The Fraud Files Blog.

Filed Under: Mortgages & Loans Tagged With: , , , , , ,

Financial Money Traps: How Your Credit Cards Can Get The Best Of You And How To Fix It

December 19, 2008 By 3 Comments

Earlier in the week we started an article series called financial money traps and in the first article we talked about timeshares and different ways they can trap you. Then next week we will finish the series with the final post on Monday.

Today post is about helping you get past some of the credit card traps out there and also to give you some tips to help you save more money and avoid getting ripped off.

My First Credit Card Nightmare

I’m sure almost all of use can speak from experience about how credit cards can bring us happiness and joy but also bring us to are knees at a moments notice.  My worst experience with credit cards came true several months back as I opened the statement and proceed to read down the list of transactions.

Everything looked good until I got to the bottom of the statement.  Their was a payment for $90 to an internet marketing company.  I looked at the name of the company and reliezed who it was.  It was an internet marketing company I had bought a book and a few DVDs from and somehow they were charging me $90 for some sort of membership site fee.

What I failed to realize was that I had been paying for this membership site for several months without even knowing it.  What a nightmare.

After calming down I dug through the fine print and realized they had given me a free month subscription to there membership site and after the first month they were going to bill me $90 every month after that.

The only good news out of this story was that after I had called the company and explained my story to them they at least refunded me the last months $90.

Why Credit Cards Take Money From You?

From that point on I learned my lesson and paid very close attention to every payment being made on my credit cards.

Or did I?

The second story is similar to the last one.  I bought an ebook on the internet about affiliate marketing.  However I clearly read the fine print this time.  This particular website had an ecourse which again gave me a free months access to.

So I decide to take them up on the 1 month subscription and take there ecourse.  However at the end of the month I went to cancel myself out of the program and realized it was next to impossible to get out of the program.

After nearly 2 months after being in there program I finally was able to get out of the program.  However to cancel I had to dig through their forum to find their phone number and then call them to cancel the subscription.  This took more time than I realized.

So why do credit cards take money from you?  Because they don’t know any better.  I could blame the credit card company or the subscription program I got involved with but it in the end it was nobodies fault but my own because I signed up for the program and it was my responsibility to cancel it.

Credit Cards May Even Try To Steal From You.

This last story happened to me not to long ago.  Again I was skimming though my credit card statements and seen a payment for $30 for a payment protector program.  I had no idea what this was for and at the least did not remember signing up for this program.

So I called the company and canceled the program but in the entire conversation with the company no one could tell me how I got into their program.  Again this shows why it is so important to read you statements.

In the end though following a few simple tips can save you some big money when it comes to your credit cards and as in my case it saved me $150 a month or $1800 a year.

  1. Review all of your credit card statement thoroughly. I can’t say this one enough.  Know who is getting your money and stop those who you don’t want to pay.
  2. Read the fine print. This is a big deal with credit card companies but also make sure you check the fine print other things you buy like internet subscription programs and membership websites.  You may sign up for something that’s not easy to get out of.
  3. Be careful who you give access to. Giving access to the wrong people can cost you big and if you do give access to a company to bill you monthly make sure you monitor them and that they debit your card for the correct amount.

Have you ever been though a credit card nightmare?  Do you have some tips to help those from falling victim to credit card abuse?  Leave a comment below and let everyone know.

This post was featured in The Carnival Of Money Stories Edition #90: The Holiday Edition

Filed Under: Credit Cards Tagged With: , , ,

Financial Money Traps: Why Timeshares Are A Trap And How To Get Out Of Them

December 15, 2008 By 23 Comments


Are you trying to sell your timeshare?  If you have fallen into this money trap you will want to read this post.  If you are interested in buying a timeshare and want to know all the pitfalls and money traps you will want to read this post as well.

Today’s post is all about financial money traps and in particular my personal biggest money trap that I’ve recently been through, timeshares and how to get out of them.  Then in the next post I’m going to talk about some of the smaller money traps I’ve faced and how to avoid them.

I was going to do just one article on all the money traps I’ve fallen into but felt this particular subject on timeshare needed it’s own space.

Why Are Timeshares Are A Bad Buy

With all the money I’ve invested into my timeshare and the little return I got back from it this has been my biggest stumbling block ever.  Personally though I am the only one to blame for the situation I am in.  I made the decision to buy it and as a result of poor education on the subject I paid the price, almost $7000.

Believe me though when I tell you sales reps for timeshares will literally tell you anything to get you to buy a timeshare.  In fact when I bought mine they took me out to lunch for a free meal and even gave a free trip to the virgin islands just for taking a look.  This may be the only good thing about the whole process.  However they’re a few things that you need to realize.

  • Timeshares aren’t an investment. When I bought my timeshare are sales rep informed us that it will grow in value as time goes on and you can sell it for more.  This is totally false.  Timeshares do not grow in value.  They are no more than just a time slot which you own at a resort not the actual real estate itself.
  • Timeshares are very hard to sell. If you wanted to sell your house you could put a for sale sign in the front yard but with a timeshare in say ARUBA, how would you sell it?
  • Timeshare loans have high interest rates. If you aren’t buying your timeshare straight up then you will have to take a loan on it.  My timeshare had a 16% interest rate on it.  You can bet I paid it off quickly.
  • Timeshare exchanges are expensive. To exchange your timeshare to another resort destination say Hawaii you will have to pay what is known as an exchange fee for around $100 to go to a different resort.
  • You have to pay for the maintenance at your timeshare. This can be costly when owning a timeshare.  Even when you have the timeshare paid completely off you still have to deal with maintenance fees.  Mine was over $600 every two years and that’s not all.  They usually increase it by 10% a year.
  • You have to pay for timeshare membership fees. Finally, once you do have a timeshare you have to pay membership fees to a timeshare network in order to use your timeshare or exchange it to go some place else.  These fees can usually range for about a few hundred dollars just to be a member.

As you can see even if you do buy a timeshare and own it free and clear it will still cost you.  Now am I saying all timeshares are bad.  No, I’m saying that timeshares have a lot of pitfalls that someone with no education on the subject can fall into a bad money trap like I did.  So how do you go about getting out of this money trap?

4 Ways To Sell Your Timeshare

When you are going about trying to sell your timeshare there are good ways to do it and some terrible and expensive pitfalls to watch out for.  Below are 4 ways to sell a timeshare, and only 3 of the 4 are recommended ways to do so.

  1. Listing Services. I don’t recommend this option.  A timeshare listing service is usually an online service where you pay them an up front fee of usually around $600 to list your timeshare with them.  Trust me when I tell you these services don’t work.  I have spent nearly $1200 with these services thinking they would send me some prospective buyers and I got zero offers form both companies I listed with.  Though if you or someone you know has had luck with these services let me know and leave a comment below.
  2. Timeshare broker. I’m not sure if this is a viable option but this would be like hiring a real estate agent to sell your property for you.  The reason why this would be better than going through a listing service is because the broker only gets paid unless they sell the property but do know that the broker will get paid a portion of the money you make when you sell the timeshare.  If you have more information about this option leave a comment below and let us know.
  3. Sell it yourself. With websites like eBay out there selling your timeshare, this may be a great option if you would like to do it yourself.  Though you should know you may or may not get the price you want out of it and if you do sell it yourself your timeshare could force you to pay a title transfer fee around $150 or more and the next years maintenance fees.
  4. The Buyback option. If you can’t find a buyer and just want to cut your ties with the timeshare call your timeshare and see if they have a buy back option.  Though you should know that you will only get about 10 cents on the dollar back out of it but at least it will be out of your hands.  The timeshare may also make you pay the next years maintenance fees as well.

Did the above information help?  I hope it did.  I know how much pain this has caused me and hope I can inform others so they don’t fall into this terrible trap.

Do you have a timeshare?  Are you considering buying one?  If you are leave a comment tell me about your situation.  Is it a money trap or do you like it?

Freatured in The Carnival Of Personal Finance #184: From The Land Down Under

If you like this post also read this post on Timeshare Resale Scams.

Filed Under: Timeshares Tagged With: , , ,