- - Thursday, September 15, 2011

Q. We have a 30-year fixed-rate mortgage in the amount of $187,000 with a rate of 5.375 percent. The Pentagon Federal Credit Union is advertising a 5/1 ARM at 3.625 percent for the first five years and then 2.875 percent for the remaining 25 years.

My wife and I are both 71 years old and we are trying to determine whether this loan would be a good move. I have a good retirement income and I am working full time and plan to do so for at least another three years. Both of us are blessed with excellent health. Thoughts?

A. You are, indeed, a refinance candidate because interest rates are so low, and I’ll get to that in a minute. I want to review your understanding of the deal PenFed supposedly is offering.

As a mortgage professional, my eyebrow rose when I read about PenFed’s offer in your email. It just didn’t sound right. If the terms that you described in your email — a 5/1 ARM at 3.625 percent, with a drop to 2.875 percent for the remaining 25 years — are correct, I absolutely would have told you to sign up.

Unfortunately, your understanding of the particular program is incorrect. After poking around a bit, I certainly can understand why you would be confused. In fact, it’s shameful.

I went to PenFed’s “Mortgage Rate Special” website and frankly was shocked at the misleading information it contained. It begins with the following statement in big letters: “If you can find a better deal, TAKE IT!”

Below that, there’s a box that advertises a “5/5 ARM — Adjusts only once every 5 years.” Below that is a chart that specifies “Months” and “Rate.” Under “Months,” it boasts “first 60” and under “Rate” it specifies “3.625%.” Underneath that it says “next 300” and “2.875%.” To me, it absolutely appears that PenFed is offering rate of 3.625 percent with one adjustment to 2.875 percent at the end of the fifth year.

The fine print under the chart confirms that the rate can rise or fall every five years over the 30-year term.

But the chart is unequivocally misleading. It absolutely gives the reader the impression that the loan program starts at 3.625 percent and adjusts down to a fixed rate of 2.875 percent after the first five years of the 30-year loan.

I phoned PenFed, got in touch with a representative from the mortgage department and identified myself as the writer for this column. His explanation of the chart was that the disclosure laws for ARMs require that the credit union assumes interest rates never budge when determining the annual percentage rate on an ARM. An APR on an ARM is impossible to determine because we don’t know where rates will be during adjustment periods.

When calculating the APR for an ARM under the truth-in-lending requirements, I believe he’s right. Because rates are so low right now, ARMs are, indeed, adjusting downward. But the APR on an ARM is meaningless because we know rates won’t remain unchanged.

It seems to me PenFed is using a legal loophole to mislead their potential customers. The plain fact that you emailed me with the false presumption that PenFed was offering a 3.625 percent rate for five years with a downward adjustment to 2.875 percent for the remaining term is evidence.

My advice: Avoid PenFed based on that website alone and seek out a lender or broker, recommended from a trusted source, that can help you choose the right program.

Send email to henrysavage@pmcmortgage.com.

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