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Insider Tips
I got a lot of response to last week’s article regarding the Option ARM program, and associated perils of placing yourself in this type of loan. In particular, two consumers who were in the process of refinancing a 30 year fixed rate in the low 5% range, stopped the process and wrote to thank me. Both parties expressed concerns that the loan officers in question had not explained the program, but when confronted with the article in hand, had confirmed the terms were just what I stated. They both likewise expressed their appall at what they perceived to be a total lack of ethics, as to why any loan officer would recommend refinancing a low 30 year fixed rate into such a product to begin with. All I can say is that it is more than just a perception. It was a disgraceful lack of ethics and the loan officers in question should be ashamed. Unfortunately, I don’t think it ever crossed their minds. In fact, in both cases the loan officers continued to try and resell the product to the respective consumers. Now you might think this article would depart here to discuss the numerous merits of licensing mortgage loan officers in Colorado. But I will save that for another article. Instead, I wanted to discuss Annual Percentage Rate (APR) and whether or not it is a good guide when choosing a mortgage product. The short answer is an absolute “NO”. But let’s take a look at why that is so. One of the consumers mentioned above, told me they had received a “Truth-in-Lending” statement (talk about an oxymoron) for the Option Loan program he was looking at, that showed an APR under 2%. Shouldn’t that mean the yield to the lender over the life of the loan was supposed to be approximately that, he asked. Again the answer is “no” and that is one of the real scandals of the mortgage industry, as far as I am concerned. Several years ago the government created the “Truth-in-Lending” (TIL) disclosure in response to what it correctly determined was abuse of consumers in auto financing. Back then, some auto dealers produced loans with a feature which we in the industry call “add-on amortization”. Without boring you with the math, just suffice it to say that a consumer would easy assume he was getting a 10% rate (because that is what the note rate said), when in fact the APR was 25%. With this latter number being so grossly different from the quoted rate, the government thought a disclosure should be required that would expose this difference. Like a lot of things the government does, it was a well intentioned effort. Now every consumer loan in excess of $5000 requires such a TIL disclosure. The problem with using APR as a shopping guide is that it is too easily manipulated under current standards. For example, just pick of the finance section in today’s newspaper and turn to the page of mortgage advertisements. Altus Mortgage, for example, shows an APR of .93% on a 40 year mortgage. Is it legal to say that, you ask? It must be. But is it true? Absolutely not! No mortgage company on the planet earth is going to lend you money for 40 years at .93%. The mere fact that the program allows the first payment or three to actually amortize at the ridiculously low start rate, in essence tricks the computer into calculating (under current federal guidelines) the whole loan on this basis. But you have to ask yourself this: Does the lender know that they are using this loophole in the federal requirement to intentionally mislead the consumer? Well I don’t know the answer to that for sure, so let’s give them the benefit of the doubt and assume they are just utter morons who actually believe they are helping. Either way, they are dangerous to your financial well-being and should be avoided. But that’s just my personal opinion! For an honest opinion on any aspect of home finance, call the expert! Dan Smith can be reached at 303-674-0201 or visit his web site at www.coloradohomeloans.com © Copyright 2004-2007 by ColoradoHomeLoans.com |
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