Have you seen this ad?

It's all over Yahoo Finance. So, if you're here, I'm sure you've been there. Sounds like a pretty good deal doesn't it? Heck, if you're renting, you're just crazy! At these rates, you could pay LESS and OWN!

Isn't that what they want us to believe?

The problem is that the math doesn't add up. If the numbers that they give us, $145,000 mortgage, monthly payment under $484, are applied to a 30 year fixed rate loan, the implied interest rate is 1.2615%. Sounds like a good rate to me. Too bad it's bogus.

I mean, the payment is probably for real. For a year or two. Maybe five if they really want to stick it to you. But then what? Well, what are current rates on real loans? Without even leaving Yahoo Finance we find that 30 year fixed rates are 6.09%, 15 year fixed rates are 5.76%, and you can get 5.74% for a 5/1 ARM. So where does this 1.26% come in?

It's what is called a negative amortization loan. When you take out a regular loan, each payment pays your interest due for that month and a portion of your principal, however small in the early years. For example, a for a 30 year fixed loan for $145,000 your monthly payment for Principal and Interest would be $877.75. So, $484 is a good deal, right?

Well, the problem is how the lender makes up the difference. They don't. They simply add the difference onto your principal. So, instead of paying off a little bit of principal each month, your borrowing a little (or not so little) more each month.

Let's say this "good deal" was for two years. After two years of your unpaid interest getting added onto the loan balance, you would owe $154,445.19. If the loan reverted to a fully amortized 30 year fixed at 6.09%, your monthly payment would baloon to $958.81. Now that may not sound like much, but remember we are only talking about a $145,000 mortgage to begin with. Double the numbers for reality. The person who borrows $290k looking for a payment of $968 is unlikely to be able afford $1917.16 two years later.

nice to have you do all of the research for us. It makes our decision making so much easi

Posted by: mbt shoes clearance | September 24, 2011 at 10:34 PM