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Bank questions answered
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April 4, 1997: 8:23 p.m. ET
Bank Rate Monitor chief answers your banking queries
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NEW YORK (CNNfn) - Here are banking expert Robert Heady's answers to CNNfn readers' questions on how to get the best deal on mortgages, auto loans, savings accounts and other bank products.
Heady is co-author of The Complete Idiot's Guide to Managing Your Money and publisher of Bank Rate Monitor. He also writes a nationally syndicated column for the Chicago Tribune, Atlanta Journal and other newspapers.
1. How do you get the rock-bottom low interest rate for a 30-year conventional mortgage?
It's the total cost you should be after, not just the rate. Many home buyers make the mistake of looking at rate alone instead of considering all the factors. Here's a sure-fire way of getting the best deal:
a) Shop at least a half-dozen lenders in your area -- banks, thrifts and mortgage companies -- by selecting those whose rates and "points" you're most comfortable with. A point is a fee you pay the bank for your loan. It totals 1 percent of the loan's total amount (i.e., $1,000 on a $100,000 loan).
b) Next, ask each lender for the dollars-and-cents answers to these three questions:
- What is the total cost of all up front fees and charges on the loan, including title search, appraisal, credit approval and so on?
- What is the interest cost on the loan for the first five years (the average time most folks spend in a house before they move again)?
- What are the total closing costs, including points?
c) Add up those three costs for each lender and you'll immediately know which offer to take.
2. My bank is really promoting electronic banking, with free software. How safe is electronic banking, and what are my protections as a consumer if I use it (my bank is offering lower banking charges to do so)?
Electronic banking -- which banks want to push you into to keep you out of their branches -- is relatively safe. But you can make it a whole lot safer by the way your computer accesses the bank. The safest strategy is to work with an institution that has its own dial-up 800 network via a dedicated phone line. That way, your information is not routed through third parties such as the Internet. Many big banks today offer direct dial-up service as well as free software (so your bank's "freebie" is no big deal).
Monthly PC banking fees can vary, running from $2.95 at Chase Manhattan to as high as $9.95 at First Chicago and Sanwa Bank, depending on the type of account you choose. Be sure to ask if there's:
- a free trial period, such as three months offered by Bank of America and PNC Bank;
- free sessions allowed each month;
- limitations or costs associated with electronic bill-paying.
One more thing: If you encounter any problems with PC banking, most outfits will bend over backward these days to correct them. Reason: They're nervous as cats about getting bad press if consumers' electronic payments go astray.
3. Do you recommend establishing a "relationship" with one bank by giving it most of your business, or do you think it wise to shop around each time you have a need?
Never give a bank all or most of your business unless you're 100 percent convinced that you're a) earning the highest yields on your savings, b) paying the lowest rates on your loans and c) being charged the lowest fees (preferably no fees) for whatever services you use.
I've heard people say, "I do all business with Megabuck Bank because it's close by, and the people are nice." Those are foolish reasons, except that in certain instances, a strong relationship with a bank may prompt it to overlook a wire-transfer fee or bounced-check charge.
Your bottom-line decision on where to bank should be based on which outfit will put the most money in your pocket -- period.
Banks today want all your business, not part of it. That's why they promote "relationship" packages -- made up, for example, of a bundle of savings, checking, credit cards, loans and other accounts. In exchange, you might get a small discount on loans, and a no-annual-fee Visa or MasterCard as part of the package. The downsides are that you may not need all those services, and you might be better off by shopping the individual accounts separately at other banks.
4. Why is it that while U.S. interest rates have been stable for over a year (the recent increase not withstanding), the interest that banks are paying on savings and checking is going down?
Several reasons. The economy in the past year has been in a slow-growth pattern, with no threat of inflation. That's kept interest rates down.
Second, banks pay and charge what they can get away with -- not a penny more or less. The economic strength or weakness of a particular market influences what institutions in that city offer on loans or certificates of deposits (CDs). The more robust the market, chances are the more money that consumers and businesses in the market borrow. That causes banks to raise rates to attract new money to replace what they lend out.
Your observation on falling rates isn't entirely correct. It's true that rates on money-market accounts, passbook savings and interest-bearing checking have declined by nearly 0.1 percentage points over the past year because banks are getting all of this business they want over the transom.
But the yields on CDs have actually increased by about 0.25 to 0.5 percentage points in the same 12-month period. The average six-month CD, for example, has risen from 4.55 percent to 4.83 percent, while the yield on the 2 1/2-year CD has jumped from 4.88 percent to 5.43 percent.
Meanwhile, the Federal Reserve's March 25 rate hike is pushing CD yields even higher. In the past week alone, the 2 1/2-year CD yield gained by nearly 0.1 percentage points. It's typical that within six to eight weeks after a 0.25 percentage point Fed rate increase, CDs shoot up by between 0.15 and 0.2 percentage points.
5. We all hate to pay ATM fees to use another bank's machine. Is there any incentive for those banks to not charge fees, since we are not their customers anyway? Would an interbank network fee-increase among themselves be profitable enough to make them want to have our ATM business?
Banks aren't about to surrender the golden goose they've found in charging customers a fee when they use other banks' ATMs. The banks make between $1 and $2 per transaction, and it's been estimated that the industry takes in about $2.3 billion a year in ATM fees.
This is ironic, because banks have been adding fees on other services to persuade customers to stay out of the banks' lobbies, not interact with live tellers and conduct their banking electronically by ATM, PC or phone.
In other words, they've got you coming and going, fee-wise. I've heard of only one bank that pays the customer to use an ATM instead of going through a live person.
But right now, the biggest ATM flap is the surcharge on top of what your bank charges you when you use another outfit's machine. In this case, it's the other bank that hits you with the second charge, generally about $1.50. When you add it to your bank's fee, the total ATM transaction cost comes to nearly $3.
Surcharges have become such a profitable new business that insurance, mortgage and oil companies, as well as big retail chains such as Wal-Mart, plan to muscle in on banks by rolling out thousands of their own ATMs.
6. My husband would like to increase our mortgage payments by $100 a month toward the equity. Several financial advisers disagree with this approach. What is the benefit to increasing payments toward the principal? What are the losses, since we have a combined credit card debt of $5,000?
I'm sure the financial advisers you've been talking to are brainy people, but I wouldn't buy their argument. The benefit of making bigger payments toward the principal is that you pay off the loan faster and save a ton in interest costs.
Here's an example:
Say you get a $100,000 mortgage for 30 years at the current average fixed rate of 8.11 percent. Your monthly payment would be $736, and your total interest cost over the life of the loan -- not counting the principal -- would be an astronomical $172,715.
But if you added an extra $100 per month as payment against the principal, you'd pay the loan off in about 20 years, and the total interest would be slashed by more than $68,000!
7. I think my car may not make it another six months. However, I do not have the money to purchase the car I really want. What would be the best interim solution? Some suggestions have been buy a slightly used (less than 6-month-old) car, a new but "conservative" car, or leasing a car. Which would put me in the best position to afford my "real" car three to four years down the line?
There are several routes to go, depending on exactly how much cash you have available for a down payment and monthly payments thereafter.
Assuming your finances are lean, I'd first get myself a 3- or 4-year-old used car in good condition. Why a used vehicle? Because there's a glut of them on the market right now, and dealer competition is keen.
Preferably, buy the car outright; if you can't, finance the vehicle at about 2 percent above the new-car finance rate, which now averages 9.32 percent. Do not finance through a dealership, because the dealer will mark up the rate a bank would charge.
Work directly with the bank, or, better still, a credit union that will charge an even lower rate.
The used car should make it for three years. Then, you can swing into a lease for the new car of your dreams -- provided you can afford the payments.
8. I'm preparing to build a home and plan to pay 10 percent down. What is the best mortgage plan these days?
The answer depends on a whole bunch of factors, beginning with your personal financial situation, your earnings outlook and how long you expect to remain in your new home.
If you'll probably stay four years or less, you probably should select an adjustable-rate mortgage (ARM), currently averaging 5.84 percent for the first year.
The rate can rise by a maximum of 2 percentage points a year, which means it can go to 7.84 percent the second year, 9.84 percent the third year, and so on.
Typically the rate will be capped at no higher than 6 percent over the life of the loan (11.84 percent in the example given). Were you to move again in a couple of years, you wouldn't get burned too badly if ARM rates moved up.
However, if you're going to stay in the house for lots of years, you definitely want a fixed rate (now averaging 8.11 percent), not an ARM, because the fixed rate will never change.
The very best plan, if you can afford higher monthly payments, is a shorter-term loan such as 15 years. If, say, you borrow $100,000, the payments on a 15-year would be $930, versus $736 on a 30-year loan.
But the total interest cost would be $69,322 with the 15-year loan, compared with $172,715 with the 30-year.
That's a savings of $103,393!
9. I need to purchase a new car. I have been contributing heavily to my 401(k) and other mutual funds, so I do not have a lot of ready cash on hand. I typically keep my cars for five to six years. In this case, I will turn over my current car (122,000 miles) to my 16-year-old son. I have no credit-card debt and considerable equity in my home. I could handle monthly payments of $300 or so.
Should I use a home-equity loan to take advantage of tax-deductible interest, rather than use a conventional auto loan? We would like a car in the $20,000-$25,000 range, so is a lease versus a purchase any consideration?
You have two obvious options:
1) get a home equity line of credit against your house. The interest rate is about 9.25 percent for the first year, after which the rate will probably adjust upward to 10.5 percent or thereabouts.
The interest will be tax deductible, which it isn't on credit card or auto loans. Just remember, you're hocking the farm when you go this route. If you can't make your payments, the bank will grab the house, not the car.
2) You can borrow against your 401(k) and repay that loan over time. The nice part of such a deal is that any interest you're charged will be paid back to you, not to a bank.
Your main problem will be getting a $20,000-$25,000 car for a payment of only $300 per month. You might come close to that figure if you agree to finance for five years instead of only three or four, because that will reduce the payment.
But it will also increase your total financing cost. Try to put the loan through a credit union if you can, because the rate will probably be about 1.5 percent less than at a bank. Bottom line: A lease may be your best strategy.
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