People are Smart
Everyday, I sit in my office and have to watch the new ad campaign that Ditech is running and I wonder… why do they advertise the absolute worse loan that a borrower could take? Do people respond? And it makes me wonder, does Ditech really think “People Are Smart” or are they laughing behind our collective backs and the ad is really meant to be sarcastic.
Here are the details of the loan they offer:
30-Year Fixed Rate at 6.125%, but the costs, turn out to be $12,000. (Example uses $300,000 loan)
No loan professional would EVER take this loan. Here’s why:
In the first year, you have to pay the 6.125% ($18,375) PLUS the $12,000 in costs PLUS unless you wrote a $12,000 check at closing, you owe an additional $735 in interest JUST TO PAY FOR THE CLOSING COSTS. This gives you an APR of nearly 11%. At the end of the 1st year, you will still owe $309,000.
In the second year, you get to average out your costs over 2 years, so your APR drops to 8.5%. The 3rd year 7.60%, the 4th year 7.2%, etc. YOU WILL NEVER SEE THE 6.125% NOTE RATE EVEN IF YOU PAY ON THE LOAN FOR 30 YEARS.
Now, here is the KICKER. You borrowed $312,000 when you only needed to borrow $300,000. It will take you 4 YEARS JUST TO PAY OFF THE $12,000 IN COSTS. YOU WON’T BE PAYING DOWN THE $300,000 UNTIL THE 4TH YEAR INTO THE LOAN. What a great business plan…lend somebody money, and for 4 years, you collect $72,000 in payments AND THE BORROWER HASN’T EVEN BEGUN TO PAY DOWN THE HOUSE. THEY ARE MERELY PAYING YOU BACK FOR THE FEES YOU CHARGED THEM.
EPIPHANY: You can get the same loan, $300,000 ON A NO-COST BASIS for 6.625%. With the lender paying ALL the fees, your 1st payment will go towards paying off your house. By the way, the difference in payment between 6.125% and 6.625% (what did you get for your $12,000) is only *$25/month! Oh, and after 4 years, you will owe $285,000 instead of $300,000. If you decide to move, that’s an extra $15,000 in your pocket.
Don’t let the banks tell you “You are Smart” protect yourself; educate yourself, and Get Smart.
*$300,000 at 6.625% $1,920 (Principle & Interest) Vs. $312,000 at 6.125% $1,895 (Principle & Interest)
-Mortgage Maniac