Perhaps some might think the title is a tad harsh but with the lack of truth in advertising in this country it is every man or woman for themselves. We are stuck at this time right in the middle of the worst mortgage problem, most likely in history, and what do we get: innuendos,misleading statements and chicanery from some of our financial institutions. Wow! They didn't even let the body cool down before they are out trying to slay the rest of the public. And no one seems to care. We put warnings on cigarettes and alcohol but not on financial advertising. After all the first two are bad for your health, the latter is only harmful to your wealth!
But I can't just put the blame on those companies that are operating in this manner. They give you plenty of hints at what they are trying to do to you. The first, but maybe not the worst, tells you that you get to choose your payment. COME ON! Haven't you heard that joke a million times. Your in business or have worked for a business or at least bought from a business. Did you let the customer decide how he or she was going to pay, or did they let you decide? Wouldn't you just wonder, a wee bit, what is in it for them to be so kind to you? If you didn't you need to read my column from August 3, 2006 "Haylee wouldn't get it but you should". Why are they letting you do this? We will get to that in a moment.
There are three advertisements that are really egregious: two are on television and one is on the radio. They exhibit three main problems: 1) a negatively amortizing loan, 2) advertising one loan and making you think it is another and 3) giving a low rate and a high APR. In my industry, the mortgage industry, In my industry, the mortgage business, consumers should now be aware that lack of understanding can't be an excuse. We have an unprecedented waive of foreclosures, primarily from people who say they didn't understand. Whether you or I agree it doesn't matter as it already happened. What matters is the need to know, and not the need to polish up a good excuse while you wait and pray for help.
I briefly described how you are being enticed into the negatively amortizing loan. But there is a twist. They say it is a fixed rate! It is, just under 7%. How do I know that? They give you the size of the loan and then show you 4 ways to pay. The second way is interest only.
I took the monthly interest only figure and multiplied it by 12 and got the yearly figure. I divided that by the loan amount and that is the interest rate. Would you have paid any attention to the advertisement if they told you it was a fixed rate just under 7%? Nope.
Then how could you tell if the loan was negative. Simple. If you don't pay the minimum interest each month, the part you do not pay is added to your balance and your loan balance goes up, not down. There first option was less than interest only. Voila!
The second advertisement talks about getting you a fixed rate and gives you a very low interest rate. It is a fixed rate, true, but it is a 15 year fixed rate, not a 30 year. Most people will pick up the phone and call because they have found this terrific low 30 year fixed. If you know anything about me you know that a 15 year loan is my favorite loan. But I do not advertise it as a 30 year, I screamed about it as a 15 year because I truly believe it is a way to change your financial life forever. My father told me from the time I can remember that if someone feels that they can mislead you in one instance they certainly won't stop there. Simple solution: put the type of loan and interest rate in big print, not small.
The third example is on radio and this advertisement talks about a 15 year loan (good) at a rate that is not realistic and then gives you the APR, annual percentage rate, which tells me, but probably not you that it has a lot of points with the origination of the loan. A point is 1% of the loan and they are talking about 3 or 4 points. If you have a $300,000 loan and you find out that to achieve the rate they are talking about you would need to pay $9000 to
$12,000 up front. Most people would laugh and hang up. That isn't the answer. You need to know how a point works so you can evaluate the situation. By paying a point you get a lower interest rate and lower payment. Thus you save money on a monthly basis. You take the monthly savings and divide it into the cost of the point. That will tell you how many months you will pay before breaking even. On a 15 year loan I wouldn't go over 36-48 months. Why? Because if you wait much longer you might sell the house or refinance the loan again for other reasons and never make up the dollars you spent. That is why it generally never pays to take more than a point. It doesn't make financial sense.
The aforementioned examples are not the only ones out there, but just the most popular at this time. Again, we are in a poor place in this country with all of the foreclosures that have happen and will happen. Even if society would condone the phrase "I didn't understand how the loan worked" do you really want to be tricked?
It is up to you. Either learn, stay out of the real estate market (and really other financial markets as well) or be prepared for the worse case scenario. Everyone can learn the basics of real estate and real estate financing if you only ask.