Ad on loan too good to be true

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I was driving back to my office one day recently after an appointment. As usual, I had the radio tuned to a news station. An advertisement from a mortgage company came on.

I usually try to listen to mortgage ads because I own a mortgage company and I write this column. It never hurts to hear how companies advertise.

The ad started out something like this: "If you're paying more than 1.25 percent on your mortgage, you're paying too much. That's right, we have mortgage programs with a payment rate as low as 1.25 percent."

I know the business, and I know the jargon. The ad uses the term "payment rate" rather than "interest rate." They are different things.

Interest rate is the actual cost to borrow the money. Borrowing $100,000 with an interest rate of 1.25 percent means that the total interest charged is $1,250 per year, provided the balance doesn't change.

A "payment rate" means the lender allows the monthly payment to be equal to a 30-year amortization as if the actual interest rate were just 1.25 percent. It has nothing to do with the actual interest rate charged on the loan.

If the actual interest rate is significantly higher than the payment rate, borrowers who choose to make the payment rate will incur negative amortization, which means the balance of the loan increases because the payment doesn't cover the interest charged. This is not necessarily a bad or good thing, as long as the borrower knows what he's doing.

However, I got the feeling that this radio ad wasn't intended to be completely upfront. The first line of the advertisement bothered me.

Here it is again: "If you're paying more than 1.25 percent on your mortgage, you're paying too much."

It's certainly reasonable to think that folks who are not mortgage professionals can be duped into thinking this company is offering a mortgage loan with an interest rate of 1.25 percent. The ad gives a toll-free number with the last four digits in letters, spelling out CASH or LOAN or SAVE; I can't remember which.