"We Can Lower Your Monthly Payment" by putting you in a mortgage with a rate as low as 1.25%. "We will help you save hundreds of dollars a month."
How many of you get a letter in the mail saying something simillar to this? I get at least 2-3 a day, and sometimes as much as 6-7. Personally, I am getting tired of all this junk mail being sent to me. I am a mortgage broker. I know I got the best deal for my situation. But I never looked at from the person in the market's point of view.
So here it is Sunday afternoon, I drove over an hour to meet a client at his work place to discuss financing his new office. One thing led to another and he said, "I get these letters in the mail all the time telling me that I can have my payments lowered on my mortgage. How do they know how much I am paying now? And how do they know that I can qualify for this loan? Are they pulling my credit?"
Wow, I never looked at it that way. To me, it is just another company trying to sucker someone in.
Well to answer the questions, I told him that most of the information that they are reporting about your current mortgage situation is public records. Anyone can find out who you borrowed the money from, how much, when, and most times at what rate. As for qualifying for the loan, they do not know if you qualify. And if they are pulling your credit, you have a lawsuit in the making. They are not allowed to pull your credit to grant you financing without your approval.
I went on to explain to him about the program. Sure they may be saving you money on a month to month basis, but you are going to be paying for it in the end. You see where he currently lives, his housing market is still declining. If he was put into one of these option ARMs without properly being educated, which I strongly doubt would happen, when he goes to sell his house, he would owe money. (Here is a little test: next time you get one of those letters, call. See if you feel as though you were properly educated on the loan).
Anyway, back to the story... I explained how the program worked. There are two rates on these mortgages: a payment rate and an interest rate. The average interest rate on these is 7.5-8.5%. The payment rate is 1.25%. We did the math. He would be defering about $500 per month ($6000 per year). Now take that same $6000 and add interest to it at 8.0% (hey, it gets added on to the outstanding principle balance. You still owe interest on it.) Now, you are paying interest on the interest you did not pay. As the balance goes up more and more each month with the deferred interest and rising rates, your appraised value of your house is coming down. As you can imagine, he did not think the trade off of saving money now was worth having to pay to sell his house in the future.
Now, he has joined the campaing of shredding those nasty letters to make sure that he has enough confetti for New Years. On a side note, I got him to also let me refinance his house as well as his two investment properties.
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