Your Loan Officer Lied to You (And You Let It Happen)

Note: If you are unhappy with your current interest rate on your mortgage and/or are curious if you qualify for something lower and want me to take a free look at your situation, email me directly at Wbarnwell1@gmail.com. Also email me if you plan on making a home purchase in the near future or have any other needs involving mortgages.

A good rule of thumb in life is, “If it seems too good to be true, it probably is.” This is especially true in the world of lending and home mortgages. Basically any promotion for a “great” home mortgage program you see on the internet or on TV is something you should be wary of. You would think this is common sense, but apparently it isn’t, since mortgage companies continue to rely on these types of ads and consumers continue to fall for them.

Whenever you see any type of ad on the web that promises something like “A 300,000 dollar home mortgage for only $600 a month!!!” your baloney meters should be going off of the charts. No, this isn’t a well-hidden great deal that you just happened to stumble upon. At worst it’s a scam and at best it’s a legitimate but unwise loan product that is bad news for the vast majority of consumers.

Such loans typically fall under the umbrella the Adjustable Rate Mortgage. All home loans are basically categorized as Fixed Rate Mortgages (FRM’s) or Adjustable Rate Mortgages (ARM’s). With a FRM, the interest stays the same during the life of the loan, unless one opts to refinance at some point with the hope of obtaining a lower interest rate. With an ARM, the interest rate, which is tied to an index, will periodically adjust. It’s the latter group that most the neat and gimmicky loans fall under (balloons, interest-only, options, etc). This does not mean that an ARM is never a good idea. Often times they can be. It depends upon one or a combination of these various factors: (1) A borrower’s individual situation (2) If the borrower only plans on staying in the residence for several years, and (3) If they are knowledgeable risk-takers who have taken into consideration all of the risks involved. Also, ARM’s can be refinanced just like FRM’s.

The problem with various ARM’s is that they are often sold to uneducated borrowers who haven’t read the fine print regarding their “great deal.” For example, just about every mortgage company will post rates on their websites or on rate sheets that they distribute. You might see something like, “We offer rates as low as 1%!!!” Then if you look next to the 1% you’ll probably see an asterisk. Whenever you see an asterisk, again, the warning bells should be ringing loudly in your head.

Follow that asterisk to the bottom of the page and you’ll probably see something in miniscule print that explains something to the effect of, “A payment based on 1% does not constitute a full payment of principal and interest. Full payment is based on a fully indexed rate of 6.17%. Making minimum monthly payments may result in negative amortization.”
If the asterisk set off alarm bells, the words “negative amortization” should send you running for cover. What is negative amortization? Basically, when a payment doesn’t even cover the full amount of interest owed per month the remaining interest is then added onto the principal value of the loan. Thus, with these types of payment habits you wind up owning more, not less. Keep this up over time and you’ll owe a lot more.

Of course with any kind of debt, nobody is forcing you to make minimum monthly payments. But human nature is such that people would rather pay later, not now. Many people hate going to the dentist. They don’t like practicing good oral hygiene. They know these aren’t good habits, but they just figure they’ll deal with it later, rather than invest the time and money now. Only when they finally go visit their dentist three years later their teeth are filled with cavities. All that waiting and putting responsibility off catches up with people at some point.

Creditors know that when faced with the option of making minimum payments, or going above and beyond, plenty will only do the absolute minimum of what is required. Your credit card companies know this well. This is why it’s insane for credit card holders to regularly make minimum payments on their high-interest revolving credit cards.

The home mortgage industry knows that people like “choice” so in recent years the popularity of “Option-ARM’s” has increased. These are Adjustable Rate Mortgages that give you the option of what you want your payment to be each month. Typically you have the option of making an interest only payment, a fully amortized 15 or 30 year payment, or some other lower payment that will not fully cover interest and principal.

These can work well for responsible people who might have fluctuating income (such as small business owners) and understand the nuances of Option loans. Unfortunately, the crowd normally signing up for such loans is not typically the most responsible lot. They are suckers for the TV commercials from the big name mortgage companies that make it sound like there are no consequences for regularly making half of their full payments. “What a great deal!” they say to themselves as they proceed to call up the “mortgage expert” who promised the option of paying $650 a month for a $200,000 loan.

You see, it’s not that Option-ARM’s are always an unwise product. They can be good products for strategic and wise people. It’s just that it’s usually unwise people who flock to such programs without first getting all of the facts.

In the past few years, their loan officers were able to approve them for these types of loans, but the borrowers were not psychologically or financially prepared to make their higher payments once their rates began adjusting upwards and once (or if) they realized that their principal was getting larger and not smaller. Given that they were willing to look for the easy way out when it came to borrowing such a large sum of money and making their payments, they typically were the type that looked to cut corners in general in life. Add it all up and it doesn’t equate to a very responsible borrower. And it’s these types of folks who are foreclosing at record rates throughout the country.

The moral of the story? If you aren’t prepared to at least usually make the full payments with these types of loan products, you have no business “buying” a house.

Every loan officer is required by law to provide their clients with a “Good Faith Estimate” about the cost of closing their loan. They are also required to tell you the details about the nature of the loan you are signing and answer any of your questions to the best of their ability. But many of them hope you don’t ask a lot of questions. They hope you don’t really read the Good Faith Estimate too closely. Many will tell you just enough to get you to closing, sign the documents they need signed, so you will go on your way and they will get their commission check. It’s only later that you or a loved one realized that you’d been suckered.

Maybe you’re reading this and saying, “Yeah! They sure did take me for a ride! I should have had more information disclosed to me! They shouldn’t be allowed to put out those misleading rate sheets with all that tiny fine print! They should have told me more upfront before closing!” And yes, they should have. But maybe your anger is directed ultimately at the wrong place.
In the end result, the problem is not “predatory lending,” it’s an uneducated consumer. There would be no “predatory lending” if there were not consumers who would take the bait. If you or your loved one had done your homework ahead of time, you could have saved yourself a headache. So yeah, while your loan officer and 90% of the mortgage ads you see online or on television are not giving you the full story, we also have an obligation to ourselves to know what we are getting into.

If you’re unhappy with your fixed or adjustable loan product, you have certain options. It may or may not be in your best interest to refinance your loan. If refinancing wasn’t the best option you could begin making a larger than required monthly payment. You could employ more responsible spending habits in general, paying down other high interest debts and focusing on building up some personal savings. Others think it’s better to invest in the stock market or gold rather than paying off their mortgage early.

Whatever path you take, you need to develop a plan. It’s also time for consumers to educate themselves about such financial matters instead of blaming everybody else for their situation. Mortgage and other financial professionals might mislead you, but ultimately you are the one signing the dotted line.