In today's home-buying market, interest rates are so low that many financing offers may seem too good to be true. Well, guess what? Sometimes they are! And they could seriously mess with your savings.
To help you separate the real deals from the rip-offs, we've spotlighted a few terms you may have seen that could be -- how do we put it -- misleading. Here's a reality check behind those ever-so-enticing words.
Low fixed rates!
You think: The interest rate will remain low over the life of the loan.
The truth: Some lenders advertise "low fixed rate" mortgages that are really adjustable-rate mortgages (ARMs) -- in which case, that low fixed rate refers to just the initial term (e.g., five or seven years) before the rate adjusts. Usually upward.
"The thing that troubles and worries us right now," says Thomas Martin, president of the Homeowners Consumer Center in Washington, DC, "is that rates are at around 4% for a 30-year fixed mortgage. There are lots of ads touting 3% rates, but they're for ARMs." Translation: a rate that starts at 3% could end up at 5% after a few months.
Consumer watchdogs and government agencies, including the Federal Trade Commission and the states of Washington and Colorado, have gone after lenders who intentionally use vague and misleading language to advertise ARMs as fixed rate products when they're not. But that still hasn't stopped many mortgage brokers from taking linguistic liberties.
You think: As a homeowner you won't have to pay property taxes or any taxes, period.Sounds awesome, right?
The truth: If you're looking into getting a reverse mortgage -- an increasingly popular option for seniors looking to tap their home equity in retirement -- the advance you receive is not taxed. But that's it.
When the Consumer Financial Protection Bureau conducted a focus group on mortgage advertising earlier this year, one of the most common misconceptions it saw among the participants was the idea that homeowners would not have to pay property taxes at all on reverse mortgages. That's a potentially expensive misunderstanding. In fact, one of the stipulations for many reverse mortgages is that owners must stay current on property taxes. Failure to do so could result in foreclosure. Also, the fees for missing tax payments can add up very quickly.
You think: Woo-hoo, this is a really awesomely safe product because the government gave its super-special stamp of approval!
The truth: Nearly all mortgages are backed by the U.S. government, because they are held by Freddie Mac or Fannie Mae. A slew of late-night infomercials for reverse mortgages, for example, have even featured elected officials (such as former Sen. Fred Thompson) to emphasize the fact that the government is A-OK with these products.
In the CFPB focus group, participants thought the reverse mortgages advertised were part of a "program." One participant even said, "I feel more comfortable if the government is behind it. Otherwise it is just business," while another said that if a "former congressman" endorses the reverse mortgage, "it makes it sound like a good idea." Unfortunately, it's probably a better idea to be wary of any lender that touts the government's involvement too enthusiastically.
Read the fine print!
You think: Wow, this upstanding company is actually inviting me to read its tiny, extra-fine print -- so it can't contain anything bad, right?
The truth: Yep, the fine print is just sitting out there in the open, waiting for all to see. However, the print is so fine, you can't possibly read it. You're not getting old; according to the CFPB report, very few focus group participants could read the fine print in magazine or newspaper ads, and absolutely none could read the fine print used in TV commercials.
But the fine print often still contains a ton of scary stuff: In fact, a ProPublica investigation found a number of mortgage servicers' ads included waivers in the fine print that prevented homeowners from fighting foreclosure or suing the mortgage servicer. In other ads, the fine print included the most important piece of information for the borrower: the annual percentage rate or the actual cost of the mortgage. Our advice? Break out a magnifying glass -- a big one -- and read the darn thing. You may just be shocked at what you find.