The Dark Side

The Dark Side

If you have read any of my previous writings you have seen where I have referenced someone giving in to the “Dark Side.” What is the “Dark Side” you ask? Well the answer is the lender; you pick them, who prey on the uneducated borrower. They spend a lot of money on advertising, radio, print, television, even the internet to attract the borrower with promises of a lower rate, lower payment, and no mortgage payment for 3 months, anything that they can say to make the phone ring. Enticements such as a free cruise or vacation if you close your loan with their company. Anything to get the borrower in the door and take advantage of them.

Now what do I base this on you ask? Here is the simple truth; we are all getting the money from the same place. It really comes down to who has the lowest overhead and who has the least amount of people getting a commission out of the origination of the loan. 95% of the time the loan is backed by a mortgage backed security that was put in place by Fannie Mae or Freddie Mac. When you go into the sub prime mortgage market, their loans are securitized also and a premium or value is place on the note at a certain rate. If the loan is sold at a higher rate, then more value is placed on the note or the seller of the note receives more money. On occasion a lender will secure a block of loans at a rate that is slightly below the market rate. In this instance they have guaranteed delivery of a package of loans that meet the secondary guidelines at that interest rate. When this occurs, the lender is making less than the normal premium for the sale of these loans and will use this as a loss leader to generate phone calls. Those loans that don’t meet the criteria of the loans for the package are the loans that the lender then makes their money on by selling their other products at a premium price or with additional fees.

What about the really low interest rates or the Option A.R.M.’s you ask? The Option A.R.M. is a fantastic product for the right person. However for most borrowers this is too complex of a loan for them to comprehend or to manage effectively. This loan starts with a low teaser rate, but that rate is only good for as little as one month, and then the rate starts climbing monthly. When the rate has fully adjusted it is usually about 1.5% higher than the current 30 year fixed. The catch is that the payment is set off of the initial interest rate and they give you 4 options on what payment to make every month. You can pay the minimum payment, which covers the interest only at the initial rate, you can make an interest only payment, you can make a principal and interest payment on a 30 year amortization schedule or you can make a principal and interest payment on a 15 year amortization schedule. The sales pitch teases you with the low rate and the idea that you can pay off your loan in half the time of a normal loan. What they gloss over is the fact that if you don’t pay the 15 year payment schedule every month and only pay the minimum, then you end up adding to the principal owed and create a negative equity position. In addition, this loan has origination fees and a pre-payment penalty which make it expensive to get and even more expensive to get out of when you realize your mistake. Now, if you are diligent and pay the 15 year schedule you can pay down the principal quickly, but most people do not do that. They see the minimum payment every month and only pay that. At the end of a year, the minimum payment adjusts 7.5% while the rate has increased and the negative equity gets worse each month. If you are someone who gets large bonuses each year and can pay down the equity balance, this loan will work for you. Pay the minimum each month and at the end of the year, recoup your losses by paying down the principal balance of the loan. However, if you are not one of these people, run from this loan.

More on the “Dark Side” next week.

Special thanks to Peggy Kohl for the referral of Mike Kitson.

Thank you to John and Jessica Doll for returning to me for a refinance.

Congratulations to Melanie Cooper and her team for joining Keller Williams Realty. I wish you the best of luck on your growth path!!!