When it looks too good to be true
... you know what they say.
You can say it about some Charleston MLS listings and you can say it about some of the mortgage ads you see like this one.
Too good to be true? Let's look at this ad more carefully.
First of all, the reference to Obama's refinance plan is questionable but putting that aside for now, it's obviously good copy writing by the advertising agency because it makes you think that the government might be sponsoring their program. And of course, a fabulous rate is always good for clicks. And when you click through, you'll find that you can refinance a $200,000 loan for under $899 per month.
Sounds good but let's take a look at the fine print.
*A monthly payment of $898.09 is based on a 5-Year ARM (Adjustable Rate Mortgage) with a fixed interest rate of 3.500% (3.424% APR) for a period of five years and 1.500% points due at closing. After the initial period, the interest rate will adjust annually.
Actual mortgage payments will vary based upon your individual situation and current interest rates, and these loan terms assume you pay all closing costs out of pocket. This loan may not be available in all states, and not all consumers will qualify for these monthly payment terms. These terms are available on your primary residence with a loan-to-value ratio of 70% and a FICO credit score above 720. Other restrictions may apply. Until you lock your rate, APR and terms are subject to change without notice.
OK, it's a 5 year ARM (and like Seinfeld might say, not that there's anything wrong with an ARM - as long as you understand the terms and if it fits your time frame), there is a whopping one and a half points and by the way, a point is 1 percent of the loan amount so that's $3000 using this example (and you have to pay all your closing costs out of pocket). Minimum credit score, 720 and loan to value ratio of 70 percent.
Now it seems to me that when you read that something like 20 percent of all homeowners in America are underwater on their mortgage, how many of them really have to refinance when they have that much equity in their homes anyway.
Isn't Obama's plan to help those homeowners who are either distress or underwater avoid foreclosure by refinancing at today's better mortgage rates. Of course it is and that is kind of why all the government programs have failed because the lender will require an appraisal to find out how much the home is worth and that's where the real problem is because most homes won't appraise.
I've suggested that the way out of the mess we face is to allow homeowners to refinance regardless of appraised value. But NO cash out refinancing please.
And some might say that the banks should know how much the home is worth if they are going to lend money. Well, right now they have a loan on their books and they've loaned that amount of money anyway. Wouldn't they be better off is the borrower actually paid the loan back rather than negotiate a short sale or foreclose.
Admittedly, I got a little off topic as the post developed but it did seem like a good time to talk about why the government's efforts to help distressed borrowers has failed thus far and it tended to dovetail with the mortgage ad's use the government program.
But most importantly, remember what they say about when it looks too good to be true.