Whatever the New Trick in Loans is, It's an Always Attempt to Keep From Really Competing On Price

It seems every week I get asked about some new or revived trick that loan providers are pulling. The one thing they all have in common is that they are methods to avoid competing on price. What the basic terms are and how much it will cost you.

The first big weapon in the arsenal of most bad loan providers is the tendency to most folks have to shop loans based upon payment. Payment has no intrinsic relationship to interest rate, which is what the money is really costing you. But if you do tell people "$510,000 loan for $1498 per month" most people assume that payment covers the loan charges even though it doesn't. People who can afford $1500 per month payments go buy $510,000 properties based upon these payments, and only after they've signed the papers do they figure out that the catch is their balance owed is increasing by $2500 per month! negative amortization loans are the obvious problem here, but less ethical loan providers also use this fact to push interest only loans and temporary buydowns and loans that cost so much in discount points that it would take fifteen years to recover the cost through lower payments - and that is based upon straight line computation, not taking into account the time value of money.

The second tool bad loan providers use is the desire of most folks to get something for nothing, or at least appear to get something for nothing. This covers not only Mortgage Accelerators, but also Prepayment penalties and biweekly payment schemes and even debt consolidation. They show you an actual method whereby you might hypothetically have your mortgage or debts paid off in a fraction of the time and without apparent discomfort or compromising your lifestyle if you fit their profile and stick with their program. The slight of hand here is two-fold. First, these are distractions, and if you examined competitive products, you can tack these allegedly neat features onto just about any loan or do it yourself, while they're acting like their programs are somehow unique when they're not. Second, these programs see the lion's share of the benefits at least five years out - when for all practical purposes, nobody sticks with the program that long. I lumped pre-payment penalties in here, because they are an often hidden charge that brings the lender more money down the line when you refinance before it expires, or immediately when they sell your loan on the secondary market, but they don't show up anywhere on the loan paperwork as a figure in dollars you are being charged. at the time you agree to the loan. Nonetheless, most folks who accept pre-payment penalties end up paying them, and they are real dollars you end up paying.

The third tool in their arsenal is: If the cost of something isn't explicitly disclosed, most people will assume it's zero. If there's not an actual dollar figure associated with something, many people think it's somehow free. Many loan providers feel no need to disclose escrow charges, or lenders title insurance, among others. They'll mark it "PFC" as if they don't know how much it's going to be. The net result, as I've said before, is that you end up thinking that "$2495 plus third party charges and two of these points things" is cheaper than the provider who tells you they're going to deliver the exact same loan for $6000 all told (on a $300,000, loan, you're looking at over $10,000 worth of charges from the provider who didn't quote a total figure in dollars. People gripe about "junk fees" when the costs are real, but they've been deliberately lowballed. There never was a chance that they would end up not paying those fees - and they're high dollar value fees - but by not associating a dollar figure with these fees, less than ethical providers are causing people to think they're either free or something comparatively small, like the $2 per tire waste disposal fee.

All of these tricks feed upon ignorance. Ignorance of what they are really doing, ignorance of how financial markets work. The fact of the matter is that nobody is going to do a loan for free. There's a hard line where it's not worth my while to do a loan - I'd rather spend the time doing something else. Same thing with every other provider in the known universe. For some providers it's more than others, while for other providers, it's less than average. Everyone wants to make more money for the same amount of work. Competing on price is not a way to get a high number of dollars per loan - so many loan providers will do everything in their power to avoid competing on price. But there really isn't any other reason to choose a loan, other than that it's offering the same terms at a better price. A loan is a loan is a loan, as long as it's on the same terms at the same price. It's not like one loan is a Jaguar while another is a Prius and a third is a Mustang, or one is a Craftsman while another is a Colonial and a third is a Cape Cod. The only intelligent reason to choose a more expensive loan is if there is some facet of your financial situation that means you don't qualify for the less expensive loan. Unless lenders pull a major policy change in the middle of your loan process (as happened at the end of January 2009 - luckily I didn't have anyone in process who was suddenly unable to qualify), your loan officer should know what those are, and quote you an appropriate loan that you can qualify for in the first place. Many don't, but they should.

Because they don't want to compete on price, loan providers have a long list of gimmicks and irrelevancies they use to sell loans. Whenever the consumers figure out the problems associated with one, they come up with another or start pushing something else that consumers in general have forgotten about. Comparatively few people will do the research necessary to test the real value of these gotcha loans. They seem to be afraid that if they investigate, the value will somehow disappear. In reality, the vast majority of these come-ons (especially the heavily advertised ones) have no value in the first place. The ones that really do have a value to the consumer will survive scrutiny.

There is no magic wand to make loans more affordable. Not in reality. There is a reason why the thirty year fixed rate loan is the standard for consumers and lenders, and why moving away from it carries costs or risks or both. There are many valid reasons to choose another loan such as a 5/1 hybrid ARM or a fifteen year loan, but they are based upon accepting risks or costs or reduced benefits in order to get a lower cost of money.

Loan providers that don't compete based upon price compete based upon hiding the gotcha!, or pretending it's not important. If you understand the gotcha! associated with a particular loan, and are fine with it, that's great. If you don't understand the gotcha! chances are that it's going to bite hard.

Caveat Emptor

Original article here