I receive a lot of mortgage solicitation letters, as I'm sure many readers do. Most of them are misleading -- some more than others. I decided to respond to a letter I received yesterday. Allow me to share some of the content in the letter, and I quote:
- "30 Year Fixed, 1.95%" (In big bold letters at the top of the letter)
- "Our Rate Reduction Loans can provide you with a 30-year fixed rate of 1.95% ..."
- "… you can save $1,764 every month …"
- "My company believes that honesty … is the only way to develop life long mortgage customers … ."
Now let's take a look at some of the fine print on the other side of the letter, and I quote:
- "Initial Annual Percentage Rate (APR) for a 30 year mortgage loan with 80% loan to value is 4.981%. Rate is fixed for 12 months and adjusts upwards 7.5% of the payment amount annually for the first ten years of the loan."
Are you confused yet? Let's see … the letter twice touts a 30 year fixed rate of 1.95 percent. But the fine print estimates the initial APR at 4.981 percent and reveals that the rate is only fixed for the first 12 months, adjusting "upwards 7.5% of the payment amount annually … ."
Huh?
Okay, is this a 30 year fixed rate at 1.95 percent or not? I decide to make a call to the fellow who signed the letter. I ask for him by name and I'm told he's at lunch. The guy on the phone offers assistance. So I tell him that I received this letter and I'm fairly knowledgeable about mortgages but confused by the letter. How can you misinterpret a 30 year fixed rate of 1.95%?
I ask if the 1.95% represents a payment rate, and has nothing to do with the actual interest rate. The fellow confirms the 1.95% is the payment rate. I ask what the actual interest rate is. He tells me he's not sure but something close to 7.50 percent.
Now we're making some headway.
I ask him if the actual interest rate is fixed for 30 years. He says he's not sure and suggests that he get my number so the fellow who signed the letter can call me back.
A half hour later I receive a call from the letter writer. He confirms that the 1.95 percent is indeed a payment rate, not the interest rate. But then he says that if my credit is good, the actual interest rate would be closer to six percent, but he's not sure. So I ask him if the estimated six percent interest rate is fixed for 30 years. He says yes. What about the 1.95 percent?
This is when it gets really confusing. He tells me that the 1.95 percent payment rate is indeed fixed but he side-stepped my question about the 7.50 percent upwards annual adjustment.
It then gets downright absurd. He acknowledges that the letter can be confusing and maybe a little bit misleading but tells me the language in the letter is required by Federal law -- I think he said the Federal Trade Commission.
Say what??
Now it's time for me to explain this loan to the readers. The actual interest rate is very likely fixed for 30 years, and can probably be locked in at around six or 6.50 percent.
The 1.95 percent is how the minimum payment is calculated. For example, on a $300,000 loan, the minimum payment would be calculated as if the interest rate is 1.95 percent. This would make the minimum payment $1,101.
But if the actual interest rate on a $300,000 loan is 6.50 percent, the monthly interest is equal to $1625. Making the minimum payment $524 less than the interest charged. The borrower's balance will increase every month. This is negative amortization.
So this guy is trying to convince me that this shell-game-of-a-letter is a product of federal regulators. The letter's words are plain: "a 30 year fixed rate of 1.95%."
Nowhere does the letter mention a payment rate. Nowhere does it mention that making the minimum payment will result in an ever-increasing mortgage balance. And these clowns boast about being honest.
Unbelievable. Folks, I've said it many times before: If it sounds too good to be true, it probably is.
