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Is It Too Good To Be True?

By
Mortgage and Lending with All Star Mortgage, LLC

Whether you're shopping for a new car, new carpeting, or a new mortgage, the airwaves and print media are overflowing with advertisements that seem too good to be true.  Do people really get "Mortgage Rates Starting as low as 1%!", or "50% off on Carpet Installed Tomorrow"?

I guess to answer that question, you must first understand the principle behind this type of advertising.  Any "call to action" type ad is designed with a singular focus in mind - get you to move beyond apathy and take action, presumably by calling the company to find out how you can get a $250,000 mortgage for only $799 per month. 

The reality is that with most too-good-to-be-true offers, the details of the offer usually reveal that whatever is being offered really isn't that special after all.  Let's take the 1% mortgage offers that are so prevalent these days.  You'll notice if you look carefully that they almost never say that it's a 1% "interest rate", instead employing the phrase "payment rate."  That's a very important distinction because the interest rate on these types of loans is a combination of an index (currently in the 4.75% to 5.5% range) and a margin (anywhere from 2% to 4%), meaning your actual interest rate will be somewhere in the high 6's to low 9's!  But what about that 1% rate you were promised?  That's actually your payment rate, not your interest rate, meaning if you make just that low $799 per month mortgage payment every month your mortgage balance will actually go up by $800 to $1200 per month (known as negative amortization) because you're not covering at least the interest being charged every month.  So after just 1 year, you'll have taken your original balance of $250,000 and increased it to somewhere between $259,000 and $265,000 depending on your index and margin.*  Doesn't sound so attractive anymore does it?  Of course, if the truth about all of this were actually explained in an advertisement, the phone wouldn't ring very often.

Now I didn't really need to tell you that if it sounds too good to be true, it probaly is, because you already knew that didn't you.  Yet curisosity still impels us to call, to make sure we don't miss out on this great opportunity, or to see if it's real.  But before calling, ask yourself a couple of simple, common sense questions - like why would a lender loan money at 1%, when the cost of money is so much higher than that?  And most importantly, do you really want to do business with a company that practices deception to attract new customers?

(*In actuality, there's nothing inherently wrong with this type of mortgage plan; there are many instances where it's appropriate for the borrower.  However, the majority of people that get into it do so not as part of an overall financial plan, but because they were enticed by the low payment and didn't really understand how the mortgage works.)

 

Comments (1)

R. B. "Bob" Mitchell - Loan Officer Raleigh/Durham
Bank of England (NMLS#418481) - Raleigh, NC
Bob Mitchell (NMLS#1046286)

I agree with you on both counts. That these mortgage plans can have some use, but that too many mortgage lenders sucker people who it's not appropriate for in with them.  It appeals to people's greedy nature.

 

Bob Mitchell

ValueList 

May 11, 2007 02:24 AM