It hasn't happened yet but one of these days I expect to hear that one of the big three auto makers came out with an ad that says you won't have to pay gas for the life of the car. It's on them. (Some restrictions apply). Oh yes, the cars will still be the same price. Would you buy one? Would you happen to also check the price before writing the check to see if maybe they were (fill in one of the following) kidding, had their fingers crossed, mistaken, hidding something or going out of business? I bring this up because one of the largest banks in the Country just announced free mortgage loans, actually not free but no cost. Some reporter actually asked them if they were going to raise their rates and they said nooooo. In their case they are actually telling somewhat of the truth. Really!
Let's now listen to the "rest of the story". A few weeks earlier I received a letter from one of the Vice Presidents of the bank who congratulated us on a great first quarter with them. We had achieved a preferred status with them several years ago and had more than maintained that status in the first quarter. It was nice to receive the letter as I knew we wouldn't be seeing another one of them for some time.
The local rep and I had just discussed the fact that they had gotten so busy they simply raised their rates to slow things down and had been "out of the market" for over a month. The very reason we deal with many institutions. She also stated that they weren't going to come back into the market except with one or two programs and were going to let their banks offer the no cost loans as they headed down the road with a new strategy. Fast forward to the announcement and the claim they weren't going to raise their rates in conjunction with the new no fee policy: they already had! I guess this is the modern version of "straight shooting".
You might wonder why I even bring up such drivel and it is simple: people believe they can get something for nothing. As long as it is free they don't want to worry that the cost may be greater than they should bear. Let me give you some of the best examples of what I am talking about: the 1% loan, no mortgage insurance required, no bank fees, 30 year amortization loan and the no point loan.
The 1% loan isn't. The interest rate isn't one percent the PAY RATE is one percent. The interest rate is anywhere from seven to nine percent and the difference between what you owe and what you pay is added to your loan. (See most of my columns). But if you took time to think about it when they offer the 1% loan they also give you other loans at higher interest rates. Why would you take a higher interest rate if you could have 1% ?
Many companies offer the option of taking a loan over 80% of the value of your property without paying the required mortgage insurance. They simply build it into the rate and tell you so. Well, they actually all don't tell you. The insurance pays the lender for the portion of the loan over 80% if the property is lost through foreclosure. In this market do you think lenders are willing to give the high loan to value loans without that protection?
For years banks have been talking about no fees but they really meant no "garbage" fees which included underwriting and doc preparation. Usually about a$500 to $600. They didn't mean no fees for third party services such as credit, title insurance and closing agent, which are real services that must be paid. Do you think that the banks are now willing to lose about $1000 to $3000 per loan?
How many times have you heard a great rate advertised where they mention it is amortized over 30 years and hoping you interpret it to be fixed over 30 years. Sometimes the rates are up to one point lower. You realize, of course, that the amortization of the loan has nothing to do with how long the payment and interest rate are fixed?
Last, but surely not least, is the no point loan advertisement. They will give you a low rate and a much higher APR, annual percentage rate. Example: 30 year fixed at 5.75% APR 6 .125%. The APR is figured by taking the monthly payment for the loan and dividing it by the amount that is the loan, not the closing costs (Simplified). If you were looking at a $100,000 loan at 6% your payment would be approx. $600 per month. If the closing cost were $2000 then the APR would be 6.122% ($600 divided by $98,000 which is the loan minus the closing costs)
Wouldn't it be easier to just mention the points so you won't have to be surprised when you go to sign the documents and the closing cost is thousands of dollars higher?
I hate to write a column that asks more questions than it answers but I am as frustrated as the next person with the way we conduct business where innuendos replace information and repetition makes it right. Many have told me it is just a trend but if so , it seems to be getting worse. What do you think?