Everywhere you look these days, you see ads to refinance your home loan. Whether you’re online, in front of your TV, driving down the street, or listening to the radio in your car.
Mortgage is probably the most common advertisement around, and every single bank or lender out there wants you to refinance your loan now!
And because it’s such a lucrative business, it’s also a very competitive one, and mortgage companies will do whatever they can to offer homeowners the lowest mortgage payment.
So whenever you see an ad from a bank or mortgage lender that offers a lower rate, or gives you one solid payment figure based on a certain loan amount, you have to be skeptical. Very skeptical.
Does the Rate End in .99%?
- You might see a rate that ends in .99%
- Similar to prices on menus and at grocery stores
- Don’t be fooled into thinking it’s much cheaper
- Than a rate just 0.01% higher
In fact, most banks and lenders usually offer rates that end in .99% just to bring you in the door, though you never actually see that rate. So will you actually get a rate of 3.99%? Probably not.
That’s just the promotional rate, assuming you fit the exact profile of the sample borrower the rate is geared towards. You may even need to pay for that rate.
Mortgages are so complicated and complex that nobody can actually advertise one fixed mortgage rate or payment without thoroughly interviewing and underwriting a prospective borrower.
There are too many factors that will influence a homeowner’s interest rate for a mortgage lender or bank to simply state a rate on a banner ad or television commercial.
Sure, there may be introductory rates that are fixed for the first few months, or even a year, but those are just teaser rates, and will disappear quickly and leave most homeowners with even more interest to make up.
Steer Clear of Gimmicks
- Watch out for gimmicky home loans
- That come with flexible payment options
- But wind up costing you a lot more money
- Over the life of the loan
Whenever a mortgage company offers a lower rate, or some cute program named flexpay, smartpay, pickapay, secure advantage or whatever else, they’re basically presenting potential borrowers with a way to avoid paying their full interest payment.
This practice is referred to as negative amortization, otherwise known as deferred interest because the borrower pays less than the monthly interest payment.
While these lenders make it out to be a great cost-savings plan for any homeowner, it actually hurts most borrowers who make payments that not only don’t pay off any principal, but actually don’t pay even pay off the interest on the loan.
Sure, the lender is telling you the truth to a certain degree. You will make smaller payments than the borrower who paying “x” amount, but you’ll also end up in a larger amount of debt. This is the part they don’t seem to mention too often.
Not only are lenders telling borrowers to pay below their actual monthly interest rate, but they’re also putting the borrower in monthly adjustable-rate mortgage products that offer zero rate stability.
Complicated Loan Programs Maybe Best for the Pros
- Leave the complicated stuff to the pros
- Like real estate investors and home flippers
- For most homeowners
- A standard fully-amortizing mortgage is probably best
While it might make sense to some, unless the market appreciates at a greater rate than the interest rate, homeowners will lose money if they choose this type of mortgage program over the long-term and don’t have a better place to park their money.
These types of low-interest or deferred interest mortgage products are usually only helpful for investors who flip properties around quickly and don’t like too much out-of-pocket expense. Unfortunately unassuming families are getting into these high-risk loans and finding themselves in sticky situations.
So do your homework when it comes to picking out the right home loan for you and your family. The lowest payment today is usually not going to be the lowest payment for the long haul. And it might cost you a lot of money long-term.
Don’t be fooled by a teaser rate that expires after a few months. You could find yourself with a much higher interest rate, and straight back to the bank to refinance your loan into a fixed-rate mortgage product.
Read more: Should I get an ARM or a fixed mortgage?