Congratulations if you’re skeptical when you see mortgage ads like Record breaking rates! Get a 1% mortgage now! Unfortunately, not everyone is as skeptical as they should be -- the Federal Trade Commission (FTC) recently posted a consumer alert about fraudulent mortgage advertising, and it seems that many folks have fallen for questionable ads. Because your best defense against lies is the unvarnished truth, check out this guide – you’ll learn about scams and not-scams, and how to tell the difference.
Pants on fire
It’s against the law to mislead consumers about mortgages – but it still happens. Here is a list of ads that you might see, how they mislead, and why they’re illegal.
30-year mortgage! 3%!
This loan violates the law because it doesn’t provide enough information. A three percent mortgage is great if its costs are customary and if its rate is fixed. It could be a horrible loan if the rate adjusts in a month or if it costs 15 points! A three percent stated rate tells you nothing. It’s the Annual Percentage Rate (APR) that counts. APR incorporates the loan’s costs – for example, points and origination fees, as well as the interest charged. Lenders must disclose the APR in their advertising when they refer to an interest rate. And they must disclose any rate or payment that applies for less than the full term of the loan.
When you see advertising that omits costs and important terms, assume the worst and move on. Here are a few other popular cons:
No-cost mortgage refinance! No-cost refinancing does exist, but some so-called "no-cost" loans merely add the refinancing fees to the loan, increasing the size of your mortgage. How do you know that a refinance is truly "no-cost?" Your loan amount doesn’t increase – it’s the same as the payoff of your old home loan, and you bring on no money at closing.
$100,000 mortgage – Pay only $417 per month! That sounds very cheap, and it’s designed to. A $100,000 fixed-rate 30-year mortgage with a $417 payment would have a 2.91 percent rate. This loan, however, is an interest-only mortgage with a five percent rate. If it were not interest-only, the payment would be $537 a month. Other facts have been omitted as well – the payment doesn’t include property taxes, homeowners insurance, and mortgage insurance (required on most loans exceeding 80 percent of the property value).
Obama refinance! You are eligible for this special government program! This is just the latest in a classic scam in which the lender impersonates a government agency, sending "official" solicitations for a "special" program. Closely related is the solicitation that appears to be from your current lender. For example:
Important Notice From Your Mortgage Company. Open Immediately - Important Financial Information Enclosed. Please do not discard - account information enclosed. Information surrounding home purchases, including the lender and the loan amount, are public record. When responding to such an ad, call or email your lender directly – don’t use the number on the mailer or the link in the message.
Not a scam
What about the lender that advertises one rate but offers a higher rate when you apply? That’s usually not a scam. When lenders advertise, they showcase a rate that is available at the time, but might not be even a few hours later. That’s because mortgage rates are tied to global financial markets, which change constantly. It’s impossible for published advertisements, especially newspaper ads or mailers, to hit a moving target.
In addition, advertised mortgage rates might legitimately apply only to certain borrowers or transactions. Here, for example, is some of the fine print form one national lender’s online ad (considerably enlarged):
- Some restrictions may apply.
- Based on the purchase/refinance of a primary residence with no cash out at closing.
- We assumed (unless otherwise noted) that: closing costs are paid out of pocket; this is your primary residence and is a single family home; debt-to-income ratio is less than 30%; and credit score is over 720, or in the case of certain Jumbo products we assume a credit score over 740; and an escrow account for the payment of taxes and insurance.
- The lock period for your rate is 45 days.
- The loan to value (LTV) ratio is 70%. If LTV > 80%, PMI will be added to your monthly mortgage payment, with the exception of Military/VA loans. Military/VA loans do not require PMI.
What it means to you
Mortgage advertising can be irrelevant at best and fraudulent at worst. It merely tells you what might be available, not what is available to you right now. To get the best deal that applies to you takes meaningful quotes from lenders who know your circumstances. Find quotes from competing lenders, online, on the phone or in person, compare them and choose the lender with the best "real life" offer.