Most of us have heard this phrase sometime in our lives and we usually live by it. But in some cases, the deal does sound good. Take for instance the flyer I received in the mail from a local real estate company. Their goal is to prospect for renters that could be future home owners.
They have two photos of homes on the flyer, and in the upper corner of each home it says something like this: "Own for Zero down for $1052 per month P.I.*". Sounds pretty good, don't you think? (rents in the complex are between $1300-1600 per month)
Well, I noticed the little asterisk at the end of the statement, so I looked at the bottom of the page for the additional information. "Monthly payment is for 6.125% interest only". Wow, 6.125 is less than today's rate so they must be offering you a deal, right? Naturally our eyes travel to the rate, but what you might miss is the next piece "interest only". There's the catch.
I have a problem with this type of advertising because I consider it dishonest. Most people who are renting would love to own and would jump on this ad. But once they speak with the agent and lender associated with the ad, they will soon discover that on top of this price, one must add taxes and insurance. Getting someones hopes up, only to dash them a few minutes later, is not my idea of professionalism.
Here are my problems with the ad:
Advertising an interest only loan in the market today is just foolish. Interest only loans are just as bad as adjustable rate loans. Buyers can afford the loan today, but will they be able to in the future?
Interest Only means you are not paying any principal on the loan, and thus, never paying down the loan. To start to pay principle, you will have to refinance the loan, and with the way rates are going, your new rate could be a whole % more than the 6.125 shown in this ad.
Many renters do not have the best credit, so they would never be able to qualify for an interest only loan. The lender knows this and wants to find them another type of financing. One major problem is that it is a "bait & switch" type of advertising. So the monthly mortgage rate you called about, most likely won't be available due to lack of credit qualifications.
So the moral of the story is to listen to your gut. If is sounds too good to be true, it almost always is. Make sure you read the fine print for the real truth behind an ad. And of course if you have questions, don't hesitate to call a professional for more information.
4 Comments on Cheaper than Rent?
Ah, good old fine print. It is sad that people have to use this tactic nowadays.
I agree..If it sounds too good to be true, then it probably is. If the deals are that good, then why aren't the people offering them taking them. Why are they still available? If they don't want the deals themselves, then there must be a reason why!!
Jennifer, I have to disagree with one of your assumptions here. A blanket statement that interest only loans are bad (or adjustable rate loans as well) is simply too general. Interest only loans, like every other kind of loan, can be a very appropriate financial tool given the goals of the borrower and their personal circumstances. There are literally dozens of reasons why a client may want to use an interest only loan. And with an interst only loan, should the borrower decide to pay down principle they can do so whenever they wish. If I were to do a rent vs. buy analysis comparing paying rent of $1500 per month to doing an interest only loan with payments of $1100 per month, I'm pretty confident that the buying side would come out ahead.
Christopher - most people chose to avoid reading the fine print because it is really small. But the most important info is always the hardest to get to.
David- my main problem is this ad is using a great sounding deal to draw people in, who will then be disappointed when they don't qualify. This is the first interest only ad I have seen in a while.
Don - I understand your point, but only those with really good credit can qualify for an interest only loan, and only those with high scores should be given this offer as it takes a lot of responsibility. The potential buyers being targeted are two income families that for the most part will not qualify for any type of loan. In this particular area, giving an interest only loan will only lead to bad results. Rates are inching closer to 7% and who knows where they will be in a couple years when buyers will need to refinance...and they will need to refinance and start paying down the principle to get anywhere.
We are renting right now while we look for a new home, so I have the unique perspective of how this deal would work out. The fact is, that only a very small segment of buyers can qualify for an interest only loan, and sadly, most people don't have the discipline to handle this type of a loan. Many people jumped on the ARM bandwagon, not admitting to themselves their inability to afford the mortgage a few years later. We just sold a home in Florida where the loan was interest only so I know how these things can backfire on a buyer. I won't go into long details, but over $100,000 was lost on the deal, with a huge portion of it being interest only payments.
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Jennifer Kirby, the Luxury Agent
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Ah, good old fine print. It is sad that people have to use this tactic nowadays.
Thanks and good luck,
Sugar Land, Tx
Where Life is Sweet