Mortgage Advice: When Advertising is Misleading, this AD's numbers don't ADD up!

I saw a great advertisement today for the new ING Direct Mortgage plan.

Click on the graphic to see their banner ad:

"WOW!! A 5.50% INTEREST RATE" you say.  Let's jump on that one!!!

HOLD YOUR HORSES

What's BOLDED next to RATE??  6.39% APR... and $895 Closing Costs...

OK... so how did we get from 5.50% all the way up to 6.39%?  That's a 0.89% jump!! 

Let me tell you this... from my experience as a Mortgage Broker - there is no such thing as $895 creating 0.89% difference in the APR and RATE without some major hidden costs.

What does that mean?? That means that just like ANY OTHER BANK - there are costs in the rate besides the $895 Closing Costs

How can that be??  Well... Lenders - Direct Lenders - don't have to disclose all their fees up front like a Mortgage Broker does.  They can hide them in the rate and APR until closing!!

So... let's just run a $200,000 mortgage through my Loan Origination Software and figure out how much is tacked onto that loan to come up with 6.39% APR from 5.50% Rate.

In the meantime, here's the graphic that starts the "CATCH"... click on it to see it full size

First of all... quoting AVERAGE Closing Costs does not really help consumers. Plus this is BankRate.com info which is notoriously unreliable as they hide fees in their ads all the time. 

On a $200,000 loan in Florida, just Title Insurance will be $1075!  Add in Attorney Fees and Notary Fees and you've got at least another $300.  Add in State Endorsements and Transfer Taxes for another $1350.  Wow... We've already reached $2,725 and we've just started!

Does this mean Mortgage Brokers have higher fees??

• NO - it means we disclose all fees!!
• It means we show you how we got to our numbers without showing you a gimmick
• and it means that BankRate is either not disclosing or not counting all fees in their surveys!

So, back to my other window... my software has ruled this:

5.50% Rate on 30year Fixed Rate Mortgage... add $895 closing costs and your APR is......(drumroll please)

• 5.532%!!!..... still 0.86% unaccounted for!

So... I adjusted for the 5/1 ARM that they're advertising and had to make some assumptions to make this fit.

• I assumed that after 5 years, the adjustment would be no more than 1% - given that I know that most rate caps are higher than 1%, this is a tough one. 
• Then... I assumed that the rate hike every 12 months after that would be capped at ... a startling 0.21%!
• Then... I assumed a total interest cap of 1.5% (1 in the first adjustment and .25% more for the rest of the loan)...meaning only slightly more than 2 adjustments would actually occur.
• THEN and only then, I came up with the 6.389% APR for the Loan.

Now... maybe I'm just not as good at these calculations as some of my fellow Mortgage Brokers ... and maybe I just don't know programs as well as they do either...but my feeling is that this is just not a realistic assumption to make.  I make it a habit of not ASSUMING anything... and I would never assume that I could find an ADJUSTABLE RATE that would adjust that little FOR THE LIFE OF THE LOAN.

Now... perhaps an assumption of ING would be that NO ONE would adjust!!  That every person in this loan would refinance at month 60 and that all their mortgage originators would be on the phone converting ALL their clients just in time!

• Whoa... that brings me someplace totally different!  I had to add $21,925 to the Good Faith Estimate to get the Truth In Lending form to calculate this loan to 6.39% APR
• $21,925??? that's one heck of a buy down!!
• Back to the 30 year Fixed Model - $21,925 in fees would make this WELL BEYOND predatory lending in the State of Florida

I know that I'm going to get someone stopping me here so let me preface the comments with - THIS IS A FLAWED MODEL. 

What's going on here?!

• First, the scenario they show does not work without some major tinkering...
• Now the new formula of refinancing at the end of the 5th year and basing the program on a 30year fixed scenario doesn't work without some major closing costs.

Where did the Fees go??

Look... this is a very rudimentary analysis and I'm sure some of my fellow mortgage pros will comment in some of the flies in my ointment... and I'm sure some of the LENDERS out there will add their $0.02 even though they don't like this kind of news being put out there.

The long and the short of my exercise is just to show that ADVERTISEMENTS DON'T ALWAYS ADD UP.

My advice:

• always be able to call your loan officer/mortgage broker any time you need them (within reason). 
• always know where your loan is actually originating... people that are going to pull the wool over your eyes don't want to run into you at the grocery store
• always get the numbers and make sure they are explained properly
• NEVER let someone promise you the stars and the moon without putting it on paper.
• NEVER fall for a teaser advertisement for they can almost never be trusted!
• Rates NEVER work without pulling credit and doing a prequalification - and why would you give that much information to someone who has a pretty banner ad?
• TRY HARD to work with someone whose hand you can shake at least once in your life.

Just my two cents on another BAD AD!

Check out Lewis Poretz's post No fee mortgages? ah cmon..what's a fee anyway??????????? for something very similar!