11/16/2020
LEGAL DECEPTION!
A client of mine reached out to me over the weekend about an advertisement that she had received in the mail. This advertisement was promising her a 30 year fixed mortgage at 2.375% (ITEM 1) with an APR of 2.665% (ITEM 2) on a loan amount of $526,522 (ITEM 3). While technically, this ADVERTISEMENT is "Legal", it really is misleading for the consumer and I will explain why.
To understand why this ad is misleading, you need to understand the difference between Interest Rate and APR.
The interest rate is the actual rate that your monthly interest payments are calculated at.
APR on the other hand is a calculation of the rate of return for the lender based on all costs of the loan. The APR exist so that consumers can better understand how the upfront fees and mortgage insurance play in the total cost of a loan.
In simple terms, the bigger the "Spread" between your rate and your APR, the more upfront costs you're paying*. A loan with no "Fees" will have the same Interest Rate and APR.
*(As a side note, PMI or Mortgage insurance also gets factored into APR calculations; so if your mortgage has PMI, there will be a bigger "Spread" between your interest rate and APR, even if there are no "Fees" on the loan. I mention this for your knowledge, but this particular example does not have PMI.)
The actual mechanics of an APR are too complicated for me to address in this post, but as a general rule, as your loan amount gets bigger, the "Spread" between your interest rate and APR should narrow. This is because the fixed "Fees" on a loan become smaller and smaller as a percentage of your loan amount, the larger your loan gets. In our example, the "Spread" between the interest rate and APR is .29%. That "Spread" alone doesn't seem too big, but as stated above, there is no mortgage insurance on this loan and the loan amount is over $500K.
I did some reverse APR calculations and was able to calculate that this mortgage that was being advertised to my client had $20,460 in Fees/Points tied to getting that rate.
Let me say that again
THIS LOAN ADVERTISEMENT IS PROMOTING A LOAN WITH AROUND $20K IN LOAN COST/FEES!
Again, I would like to reiterate that this advertisement that my client received appears at first glance to be "Legally Compliant", but at the same time, it is extremely deceptive. This ad makes it seem like 2.375% is a reasonable rate for a new 30 year fixed mortgage.
I have had many client over the years that have gotten duped into working with a company like this because of these crazy promises, and by the time the realize the ruse, it is too late because of the upfront money these lenders charge once they "Get you on the hook."
One more observation about this advertisement and many others like it. The program this lender is advertising is for homeowners who owe more than their home is worth. (ITEM 4) The client who sent me this has a mortgage that is conservatively 50% of her homes value. So even if we ignore the ridiculously high cost of this mortgage, the borrower would not even be eligible for the program that is being advertised. This bait and switch is very common amongst these types of ads. Just remember, this isn't a loan estimate, this is an ad designed to get you to call!
The best advise I can give to everyone out there is work with an honest, knowledgeable lender who you can trust. Some random company that sends you a mailer or cold calls you generally doesn't fall into any of these categories.
The Kunselman Team has been helping consumers all over Colorado (and now in all 50 states) with both refinancing their current mortgages and purchasing new homes for over 17 years. We don't advertise unreasonable rates just to "Trick" you into calling. We offer competitive rates and fees for borrowers of all types in all sorts of scenarios.
If you'd like to learn what it's like to work with one of the best lenders in the industry, give Luke a call today at 303-579-1441. You can also start the process by filling out our secure online application at www.ApplyWithLuke.com.
