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Money Talk

Convertible Loans Have Drawbacks

September 17, 1987|DEBRA WHITEFIELD

QUESTION: I heard recently about an adjustable-rate mortgage that converts after a while to a fixed-rate mortgage. Why would anyone prefer one of those to an ordinary adjustable-rate mortgage? After all, you could always trade it in for a fixed-rate loan when the time seems right.--B. M.

ANSWER: For the home buyer who knows that a conventional fixed-rate mortgage would give him more peace of mind but who can't afford the more expensive conventional loan, the convertible adjustable-rate mortgage might be an ideal compromise.

These hybrids are priced more like cheaper adjustable-rate mortgages and charge much less to convert to a fixed rate than a homeowner with a straight adjustable-rate loan would pay to refinance. Typically, the conversion charge on a $75,000 convertible loan ranges from $250 to $1,000, whereas switching a $75,000 straight adjustable-rate mortgage to a conventional loan would typically cost between $2,250 and $3,000.

The drawback to the convertibles is that you can't convert to a fixed rate any time you please. Usually, the lender will give you five years or so to make the switch. But if interest rates go up instead of down during this waiting period, you may never get a chance to convert it, or worse, you could get locked into a very high interest rate.

As always, make sure you do your homework before you take out any of these loans. With these hybrids, especially, the initial interest rate isn't the only factor to consider.

Q: I have a quarrel with the IRS, and it looks as though I may have to go to court for satisfaction. I know I can either go to Tax Court, Claims Court or U.S. District Court. But do you know if my chances are better in one than in the others?--R. A.

A: According to the IRS, its best record last year was in Claims Court, where the agency won 76.7% of its cases. Its record in the nation's district courts was almost as good--71.8%. Where it failed miserably was in the Tax Court. The agency scored victories in only 3.5% of its regular U.S. Tax Court cases and in 4.5% of the cases that were heard in the small claims division of Tax Court.

Once you decide to take your case to a higher authority, you have the right to choose any of these forums. But keep in mind that you must pay the contested amount before you can appeal your case in U.S. District Court or Claims Court.

The Tax Court, besides providing friendlier ground for dissatisfied taxpayers these days, offers the additional attraction of requiring no money to change hands until the case is settled. If the IRS claims that you owe money and you disagree, you argue first and pay later--unless, of course, you win, in which case you never pay.

In Tax Court, taxpayers whose disputes involve less than $5,000 go to the small claims division.

Q: I got a come-on in the mail the other day from a credit-reporting company wanting me to pay $35 to review my credit records. I'm curious, of course. But isn't there some law that requires these companies to provide that information for free?--H. E. C.

A: Consumers are entitled to see their credit reports for free, all right, but only after they have been turned down for credit. In such cases, the consumer must be shown that report within 30 days of the date his application for a loan or other form of credit was turned down.

Any other time, you will have to pay about $10 to see your credit record. So why pay $35 if you can pay $10? The brochure must have been from TRW Information Services, the nation's largest credit reporting company. TRW is the only such service known to sell "unlimited access to your credit." The charge: $35.

For this amount, you can gain access to your records whenever you want, you are notified whenever someone looks at your records and you are insured in the event that your credit cards are lost or stolen.

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