Borrowing to invest is a risky strategy

Dear Liz: We are getting coaching from a finance advisor. He suggests using a home equity line of credit as investment capital. Your opinion on this?

Answer: You’re not dealing with a financial advisor who has your best interests at heart. You’re dealing with a salesman who is mostly, if not solely, concerned about the commission he’s going to earn from selling you an insurance or investment product should you take his unsound advice.

Borrowing to invest is a risky strategy. Putting your home on the line to do so is particularly unwise. The interest rates on your home equity loan may be low now, but the rate is variable and can rise substantially. If you can’t make the payments, you could lose your home.

Furthermore, the products he’s trying to sell you probably have high fees and expenses. Between that and the cost of borrowing, turning a profit will be tough.

If he were honest, this is the pitch he would have made to you: “You don’t make enough money to afford the product I want to sell to you. Therefore, I want you to put your home at risk so I can make this commission. Your borrowing costs and the costs of this investment will likely eat up most of your returns, but at least I’ll have my money.”

If he’s selling insurance, you should report him to your state’s insurance commissioner. If he’s selling stocks or other investments, report him to the Securities and Exchange Commission.

If he has any professional investment credentials — which isn’t likely, but anything is possible — you should report him to the organizations that granted those.

Remember that anyone can call himself or herself a financial advisor. There are no education, experience or ethics requirements. If you want someone who meets higher standards, look for a certified financial planner or a personal financial specialist (a designation given to certified public accountants with financial planning training).

And pay attention to how the planner is paid. A fee-only planner accepts only the fees you pay, while a “fee-based” planner may accept commissions from the products he or she sells. If you don’t want commissions to affect the advice you get, consider a fee-only planner.

Shop hard when you refinance

Dear Liz: In February 2007 we put down $75,000 on our $274,000 home purchase. In July 2010, our home appraised for $261,000. We wanted to refinance with the bank that holds our mortgage. Recently they sent an appraiser who appraised our home at $235,000. So our choices are pay almost $200 a month in mortgage insurance, bring about $6,000 to closing or withdraw the loan. I feel we tried to do the right thing: We put down more than 25% on our home, always pay on time and have FICO scores over 800. But the bank that can help us save on our loan is hurting us, not helping. What can we do?

Answer: Your lender isn’t under any obligation to help you save money. As a result — and as you’ve discovered — there’s often little advantage in sticking with the lender you have.

Whenever you refinance, you should shop and shop hard. Applying with at least two lenders will allow you to compare refinancing deals. It’s possible that another lender would have given you a low appraisal as well, but at least you wouldn’t be held captive in the way you are now.

If you want to continue with this lender and expect to remain in the home for more than a few years, bring the cash to the closing so you can pay down your loan balance to the point where you won’t need mortgage insurance.

More mortgage modification woes

Dear Liz: Your recent answer to the reader who was trying to get a mortgage modification was on the money. The staff at our mortgage servicer is not only poorly trained but completely irresponsible. They promise personal representation, then never call again, and fail to answer voice messages left for them. There are no supervisors to answer difficult questions. They cannot (or will not) give criteria for approval. They give ever-shifting reasons for denial, but ignore the responses I have given. I have been trying for a year and will continue until I am approved. But what a terrible hassle. They must have some secret agenda for not doing these loan modifications.

Answer: There’s a lot of finger-pointing going on right now about why more mortgage modifications aren’t being done, but few would argue that lenders are doing a terrible job of communicating with their customers. You might want to consider enlisting the help of a housing counselor approved by the Department of Housing and Urban Development in your quest. The counselors’ services are free or low cost, and you can get referrals at https://www.hud.gov. Good luck.

Liz Weston is the author of “The 10 Commandments of Money: Survive and Thrive in the New Economy.” Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon, No. 238, Studio City, CA 91604 or via https://www.asklizweston.com. Distributed by No More Red Inc.