- The Washington Times - Wednesday, May 31, 2006

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.

So I’m sitting in traffic, and I decide to call the number on my cell phone. The conversation goes something like this:

Henry Savage: “Hi, I just heard your radio ad about a mortgage with an interest rate of only 1.25 percent. It sounds like a great deal.”

Mortgage company: “It sure is. Let me take down some information from you so we can get an application started.”

HS: “I would like to ask some questions first. Is the 1.25 percent interest rate adjustable or fixed?”

HS: “How long does the interest rate stay at 1.25 percent?”

MC: “It’s fixed for the first five years.”

HS: “You’re telling me that I can get a mortgage loan from you with an interest rate of only 1.25 percent for five years?”

MC: “That’s right. It’s a great deal.”

HS: “What happens at the end of five years?”

MC: “The interest rate might increase, depending upon what interest rates are at the time.”

HS: “But I can get an actual interest rate of 1.25 percent locked in for the first five years.”

MC: “That’s right. It’s a great deal.”

At this point in the conversation, I make a note to myself that I used the phrase “interest rate” five times when referring to the 1.25 percent. Not once did the fellow correct me that the 1.25 percent is the payment rate. I decide to bring down the hammer:

HS: “The 1.25 percent that’s fixed for five years is only the payment rate, isn’t it? And the actual interest rate fluctuates monthly. Isn’t that correct?”

MC: “Well, yes, it’s an Option ARM.”

HS: “I asked you five different ways if the actual interest rate was 1.25 percent fixed for five years, and you said it was. That’s not correct. Why did you wait until I mentioned payment rate before you conceded that you have no such loan with an interest rate of 1.25 percent?”

MC: “Well, I …”

HS: “Do you think I’m an idiot? You were trying to dupe me into taking a mortgage using deceptive practices. I’m going to investigate you and your company.”

I then hung up the phone.

The fact is that many Option ARMs carry payment rates as low as 1.25 percent, but the actual interest rate usually fluctuates monthly, and most are hovering around 7.50 percent. This fellow made no mention of these facts.

I have no problem with Option ARMs. They are, indeed, good for some folks. However, I have a real problem with unscrupulous and unethical people in the mortgage world who engage in these sorts of practices. These creeps give the entire business a black eye.

Luckily, federal and state laws require that the terms of any loan be disclosed upfront and in writing within three days of making loan application. There are several forms that require an applicant’s signature indicating that he has read and understands the terms of

the loan.

What’s the lesson here? If you don’t fully understand the terms of the loan as described in the written disclosure forms, don’t sign them. Seek help or go to another lender. If you closed on a loan that you don’t understand and didn’t sign any disclosures, file a complaint to the company’s regulator.

• Virginia: www.scc.virginia.gov/division/banking/index.htm

• Maryland: www.dllr.state.md.us

• District of Columbia: https://dbfi.washingtondc.gov/ dbfi/site/default.asp

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail ([email protected]pmcmortgage.com).