Home loan advertising may lead buyers astray

In previous articles, we have written about the problems associated with certain types of mortgages, such as the Option ARM. While these types of loans are useful for certain situations, they are not ideal for everyone as they can cause the amount you owe to increase even as you make payments. In fact, these dangerous loans can put you in serious financial trouble if you aren’t careful. The loan amounts can easily double over time.

Such loans are best suited towards buyers who realize exactly what type of loan they have and understand that, if they are not careful, they could end up owing more money over time. And yet, in some parts of the country, these loans are being marketed by companies that advertise them as being suitable for debt consolidation. Worse, they companies are often misrepresenting them as having interest rates as low as 1.5-2% when they actually have an overall rate that is much higher than that.

Option ARM loans often have a very low “teaser” rate that can start as low as one percent. But that rate doesn’t apply over the term of the loan; no company could make money lending cash at one percent. This rate establishes a minimum baseline payment that the buyer may elect to pay each month. This baseline doesn’t even cover the interest that accrues during the month. If the buyer makes only the minimum payment, his or her loan balance will increase after the payment is made. While the loan also includes interest-only and 15 and 30 year amortization payments, these loans are often advertised based upon the minimum amount. Borrowers who would like to see their balances go down as they make payments much pay either the 15 year or the 30 year amount. Either of the other two options will contribute nothing towards reducing the debt.

And yet, in California, firms have been running ads saying ‘Get out of debt! Loans available at 1.5%” or “Lower your payments by 50%.”  An Option ARM would make a very poor debt consolidation loan, as the last thing you want to do is take cash out of a loan where your debt can increase over time. You can lower your payments with an Option ARM, but only temporarily. Eventually, as with any mortgage, you must pay off the principal.  If you continue to make the payments at the lower rate, your balance will go up. Eventually, if you do not reduce your balance by making higher payments, your lender will insist upon restructuring your mortgage in a way that makes the payments much higher.

Many of these ads are simply flyers that are passed around a neighborhood or posted on telephone poles. Advertising of this type is generally targeted towards those who are the most vulnerable financially, particularly those with debt problems. 

Do not be fooled by these ads if you see them. No one is going to lend you money at one percent. The usual rules apply when you are shopping for a mortgage. Read the terms carefully. If you do not understand them, hire an attorney to examine the document. Find a reliable mortgage company; do not use one that advertises on telephone poles.