Mortgage Loan Advertisements: Horrible and Getting Worse
Recently, a couple of mortgage places have been advertising "30 year fixed rate loan at 5.65%" like that's the lowest rate out there and it's some kind of great loan. It's not. I have 5.375% available to me. If you read my site, you may be wondering why I'm not pushing 5.375 for all I'm worth. The reason I'm not is that it's a rotten loan. It costs 3.7 total points retail in addition to closing costs. If you came to me with a $300,000 loan balance and demanded that loan, just to pay closing costs and points would bring you up to a balance of about $315,200. It costs $15,200 to do that loan. As opposed to the 6.25% loan I can do without points (based upon the same assumptions) which ends up with a balance of $303,500. It takes 69 months - almost 6 years - before the total of what you paid plus what you owe on the high cost but low rate 5.375% loan is as low as what it is for the higher rate but lower cost 6.25% loan, and you still haven't broken even then, because you still owe a higher balance. That higher balance is going to cost you either more money on your next loan, or mean you don't earn as much on the proceeds of selling when you invest them. According to my loan comparison spreadsheet, you have to keep your new loan 93 months - almost 8 years - just to break even on the additional costs of the loan with the lower rate. Most people will never keep one loan that long in their life.
I called one of the companies advertising that 5.65% to find out about the terms of that 5.65% loan. They admitted to it costing 3 points discount and it having a pre-payment penalty, which my loan doesn't have. They didn't want to admit how much origination they were going to charge, but they're bumping up against California's Predatory Lending Law's ceiling on total costs of a loan, because a $300,000 loan with 3 points of discount has already cost over 4.25% of the base loan amount (they're allowed no more than 6% maximum), assuming that their closing costs are no more than mine. I can look at it and tell you it isn't as good as that 5.375% loan that I'm not pushing because the costs are so high that it isn't as good as a 6.25% loan for most folks.
The most common mortgage advertisements are negative amortization loan payments. These are ubiquitous. I just went looking and the first one I found (I actually had to look at two web pages, too, not just one) said "$430,000 loan for $1399 per month." It says nothing about the rate, which was about 8.25% as opposed to the low 6s of a good 30 year fixed rate loan with reasonable costs. It says nothing about the fact that if you make that payment, next month you will owe over $1550 more than you owe today. That's not what most people think of as a real payment, and every time I look at one, I'm thinking, "I really hope they're practicing bait and switch on that," because it's better for their client's financial future.
Stop yourself and ask a minute: Is the sort of loan provider who uses either of these advertisements the sort of loan provider who is likely to have good loans? To compare the real costs and virtues of one loan with another? To help you similarly weigh the costs? Do either of the loan advertisements I've talked about seem like beneficial loans that you should want, or should you be running away as fast as you can? Even if they are practicing bait and switch, that practice is bad enough when you're not talking about half a million dollars, as you are with a mortgage.
Mortgage advertisements aren't honest about rate, mortgage advertisements aren't honest about cost, and mortgage advertisements definitely aren't honest about what that company intends to actually deliver. In short, the vast majority of all mortgage advertisements aren't advertising anything that an informed consumer would even be interested in. All that most mortgage advertisements are doing is trying to get you to call with a "bigger, better deal" pitch. Why? Because a loan is a loan is a loan. There is no Ford versus Chevy versus Honda versus Toyota, and few people feel any particular need to trade their loans in every three years just because they're tired of driving that loan. There is only the type of loan, the rate, and what the costs are in order to get it. If the rate isn't better, and the costs aren't paid by the interest savings, there just any point to actually getting a new loan, is there? And if you don't get a new loan, lenders and their loan officers don't get paid. But if they make it look like they're offering something better (even if they are not) you might get them paid.
Low rate, by itself, means nothing, as I have demonstrated. Rate and cost are ALWAYS a tradeoff. Every lender in every loan market has a range of available trade-offs for every loan type they offer. You're not going to get the lowest rate for anything like the lowest cost. For the vast majority of people out there, they will never recover the additional costs of high cost loans before they need to sell or decide to refinance. This is real money! If you had invested thousands of dollars with an investment firm, and upon every occasion you did so, you had failed to get back as much money as you gave them, pretty soon you would stop investing with that firm, right? Nobody brags that their investment got them a negative 20 percent return over a five year period. Why in the nine billion names of god would you want to invest in such a loan?
Nonetheless, the financial rapists continue the same old advertisements. They continue these fairy tales, and increase their next ad buy, because these advertisements work. The suckers will call in droves - or sign up on the internet, which is even worse than the same thing. If you merely call, only one company gets your phone number. If you sign up on the internet, you're going to be inundated by dozens, if not hundreds of companies, calling, mailing, and e-mailing, then selling your information when you tell them not to bother you any more. All of this makes advertising these abominations quite lucrative.
Nonetheless, now that you've read this article, you know better. You're going to understand some of what isn't being said in the advertisement, and if you do decide to respond, you're going to go in with your eyes open rather than naively believing something that might as well begin, "Once Upon A Time..." If there's one thing I can guarantee about the loan business, it's that those who go into a situation believing such stories do not end up living "Happily Ever After."
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