Games Lenders Play Part II More Misleading Advertising

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(This was originally published September 29,2005)

Here's another advertisement that I got in the mail:

"Pick a Pay, Any Pay!' The Revolutionary Option ARM!"

"Start rates as low as 1%!"

Loan amount $100,000 Payment $321.64

$200,000 $643.28

$300,000 $964.92

$400,000 $1286.56

Could this help save you money?

Let's see, given the real rate on these, there is negative amortization of about $500 to start with per month on the $300,000 loan, compounded over the three years the pre-payment penalty is in effect. Cost me $19,000 to "save" this money - even if the underlying rate doesn't rise. Not counting what it costs to do the loan. Or I refinance out of it and pay a pre-payment penalty of about $9200.

Doesn't matter the friendly sounding name you give it. An option ARM is a Pick-a-pay is a negative amortization loan.

What this guy (in this case) is hoping is that you'll be so enticed by this "low payment" that you won't ask questions. These are easy loans to sell to people who don't understand them, and impossible to those who do unless you're the person it's really designed for. Indeed, many prospective clients do not want the problems with this loan explained to them. It's like they've chosen to be insulated from reality for a time.

But this is no surgical anaesthetic. Most folks are going to want to be homeowners for the rest of their lives, and unless your income has increased commensurate with your loan balance (and prospective interest rate increases) I guarantee you that the pain will go on for quite a long time after the time of "affordable low payments". I'd rather not shoot myself in the foot in the first place.

More from the ad:

You could also lower your monthly payments. Free yourself from high interest rate credit cards and debts with a loan that could reduce your monthly payments by hundreds of dollars and leave you with enough cash to buy a car, remodel, or pay property taxes. And don't forget that mortgage interest is usually tax deductible. So you could save more at tax time.

This is all true - and only a part of the story. Remember that the easiest way to lie is to tell the truth - just not all of it. What they're selling you is the seductive "cash now - pay later". This was how you probably got into the situation they're talking about. What most people do is then take the money out and spend it, and then when the payments get to be too much, refinance again. What are you going to do when the overall payments get larger (again) next time. What are you going to do when there's no more equity? What are you going to do when you can't afford the payments?

The consolidation refinance can be a real financial lifesaver, if you do it right, have a plan, stick to it, and pay everything off, or at least pay your mortgage down below where it was before you go acquiring more debt. Fiscal responsibility is not what they're selling here.

You've earned a 30-day break from payments!

By rolling it into your mortgage, where you pay points and fees on it and the loan provider gets a bigger commission because of it. There is no such thing as a free lunch! You'll be better off if you stop looking for it. The bank is never going to give you one day that is free from interest, much less thirty. And because you don't make a payment now, you will be paying more later. Probably much more. You Never really skip a payment

You're probably going to see a lot of recurring themes when I do these quasi-fiskings. That's because the lenders and real estate agents and everybody else keeps advertising the same misleading nonsense over and over and over again, they just say it in slightly different ways. As far as I am concerned, anybody who sends out one of these ridiculous things deserves to have their name engraved on my personal blacklist of people I will never do business with. I hope for your sake that you feel the same way.

Caveat Emptor

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2 Comments

loumed said:

after Katrina I am upside down with my mortage.

my house is uninhabitable. My flood insurance check

doesn't payoff the mortage. How can i get a short payoff

due to financial hardship-i.e. relocation loss of jobs and

steady income?

One I've been hearing around here and can't figure out says both that they will do any loan with no money down and "if you come in with a $300,000 loan, you leave with a $300,000 loan" (which sounds to me like they don't roll it into the loan amount) The way they can do this? "We make enough money on your loan over time, we don't need to get it off of you upfront" (or something like that) Oh and also "And when the rates go down, we'll do it again. We've got clients that have refinanced 5, 6 times and never paid a cent"

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DM here. It's a good question, Ruth. What's going on is a loan with a yield spread premium sufficient to pay the costs, or in the case of a direct lender, where they can sell it for a fat profit on Wall Street because you've got a high rate of interest. Given most folks refinancing habits, this is actually a very good idea - if they give you a good rate. If everyone else has 6.375 available for free, and you've got 6.75 for your rate, you still got taken. See my article on Zero Cost Real Estate Loans for more: http://www.searchlightcrusade.net/posts/1151621519.shtml

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About this Entry

This page contains a single entry by Dan Melson published on May 29, 2014 7:00 AM.

Buyers Who Don't Want A Buyer's Agent was the previous entry in this blog.

The Mortgage Loan Market Controls the Real Estate Market is the next entry in this blog.

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