Q: I’m in the process of applying for a mortgage, and some of the advertised rates seem too good to be true. Are all mortgage advertisements truthful?
A: When shopping for a mortgage, you’re bound to see some advertised rates that are incredibly low. But, as you correctly assume, mortgage advertisements are not always entirely straightforward.
Often, an advertised rate will have loads of qualifiers that borrowers will not be aware of until they are deep into the mortgage application process. By then, they realize they are not eligible for the low rates they thought they’d get. But, also by then, it hardly seems worth the effort to pull out and start the mortgage process with another lender.
Other times, an advertised rate will not include the additional fees or “deposits” you’ll have to pay for finalizing the loan. Once you factor in these costs, the mortgage rate is not so low after all.
There are other ways mortgage advertisements can be deceptive, and some of them can be difficult to recognize.
Read on to learn how to spot a false advertisement and for a list of questions to ask before signing on a mortgage.
Red flags for misleading advertisements
The Federal Trade Commission (FTC) warns consumers to look out for these buzzwords and false advertising techniques when shopping for a mortgage provider:
A low “fixed” interest rate.
A fixed rate sounds amazing to the borrower—except the lender does not reveal how long, or how short, that “fixed” term will last. The rate may only be fixed for an introductory period, which can be just 30 days. Afterward, the rate will likely climb considerably. These purposely deceptive ads can easily mislead borrowers into thinking they’ve landed a truly low fixed interest rate.
Teaser interest rates.
These can take the form of claims that mortgage rates are at 30-year lows, can be as low as 1% or that a loan amount of $400,000 can have mortgage payment of just $1,200 a month. Again, these ads don’t reveal that these crazy-low rates are only for an introductory period, after which time they will significantly increase.
Very low monthly payments.
If you come across an ad quoting a very low monthly payment amount, be sure to read the fine print. You might be looking at an interest-only loan, in which you pay only the interest on your home loan each month. The monthly payment will be modest, but you’ll eventually have to pay off the principal. You will either start paying it down after an introductory period, when your rates will shoot up, or you will pay it off in a large “balloon” payment at the end of the loan. If you can’t afford this huge sum, you’ll be forced to take out another loan along with more closing costs and associated fees all over again.
Very low rates.
If you find an ad that only talks about rates without specifying if these numbers refer to the interest rate on your loan or your monthly payment rate, look for the fine print. If it’s referring to the payment rate, take the time to crunch the numbers. You might find that these monthly payments won’t even cover your interest rate. This means you’re looking at a “negative amortization” loan. If you sign up for this loan, your monthly payments might be affordable, but your loan amount will actually be increasing since you’re constantly adding to the amount of interest you owe on your loan.
Watch out for ads bearing patriotic symbols like the Statue of Liberty or a bald eagle. These misleading ads trick borrowers into thinking they represent a government agency when they are actually missives from a dishonest lender.
Zero Down or Free.
These attention-grabbing claims should immediately alert you to a scam or highly dishonest lender. Read the fine print to check out just how “free” the offer actually is. There are likely to be hefty fees or “deposits” attached to the loan.
When a lender warns that you’ll miss out on a fantastic rate if you don’t close the deal within the week, you can be sure you’re looking at an unscrupulous lender.
5 questions to ask before choosing a mortgage
To keep yourself safe from misleading advertisements and dishonest lenders, ask these 5 questions before choosing a mortgage:
- Is the advertised rate for an introductory period only? Be sure to read the fine print and ask the lender how long the promised rate applies.
- Are there hidden fees? Again, read the fine print carefully and ask about deposits or other hidden fees you may get hit with as soon as you decide to use this lender.
- What’s the APR? The Annual Percentage Rate (APR) of various loans is a quick way to compare various offers. Some advertisers will purposely bury the APR of their loan in the fine print at the bottom of their ad. Make sure you know what the APR of your mortgage is before signing up for it.
- Does the monthly payment go toward the interest and the principal of the loan? You want to be sure you’re not signing up for a negative amortization loan.
- Do I qualify for this loan? Ridiculously low rates tend to have ridiculous qualifiers for borrowers.
When shopping for a mortgage, proceed with caution. Spend some time reviewing the details of all loan offers and be sure to compare several loans before making your decision. Make an informed choice you can comfortably live with for years to come.
If you’re in the market for a home loan, we can help! Call, click, or stop by Oregonians Credit Union today to learn about our fantastic home loan options.
Have you been targeted by deceptive mortgage advertising? Tell us all about it in the comments.