Beware Lenders Offering Low ‘Equivalent’ Rates

If you’re tired of telemarketers pitching mortgage products just when you’re sitting down to dinner, here’s a sobering thought: It could get worse.

You could run into one of the new breed of mortgage marketers who want to replace your home loan with something that sounds like a lower rate but that actually is far more expensive.

Consider the case of Jon and Joann Chandler, who live in a suburban Pennsylvania community north of Philadelphia. They own a $225,000-plus house and have a 7% mortgage rate. They didn’t consider themselves likely candidates for refinancing because their interest rate is close to market level.

But a couple of months ago, Joann answered the phone and heard an intriguing offer:

For no cash out of pocket other than $395 for an appraisal, the Chandlers could obtain a new mortgage with a fixed interest rate lower than 6.5%.

The telemarketer did some quick calculations and said the new loan could save her at least $300 a month.

“I said to myself, ‘Why not take a look?’ ” Joann recalled. The telemarketer asked for some basic personal details--the full names and dates of birth of herself and her husband, plus their home address. Joann declined his request for their Social Security numbers but did provide the account number of a credit card.

Several days later a package arrived in the mail with a 10-page loan proposal from a Long Island subsidiary of an Illinois-based bank. The proposal offered a “low 6.35% equivalent interest rate” on a new $184,400 “fixed interest rate mortgage,” with “no out-of-pocket closing costs.”

The first page of the proposal offered the additional possibility of a “low 5.871% interest rate” at the end of five years, “provided you have maintained an A credit profile.”

But what is an “equivalent interest rate?” The proposal, a copy of which was provided to this reporter, explained that “due to the way we bill and apply interest, you would need an interest rate of 6.35% to match the payment terms and amount of money we are providing if you used a traditional monthly payment mortgage.”

The interest rate “appearing on the note will be 8.125%, but the equivalent rate to match our payment is 6.35%.”

Built into the deal, the proposal explained, is an “interest rate buy down” from the bank.

“While the buy down will appear on the good faith estimate as part of the closing costs,” according to the proposal, “it is not added into the mortgage loan amount and you do not have to pay it at closing.” The buy down is “a five-year interest-free note,” said the proposal.

The good faith estimate, a disclosure required by the federal Real Estate Settlement Procedures Act, was attached to the proposal. It listed the fees and charges the Chandlers could expect:

The closing costs alone totaled about $12,000, including an origination fee of $4,535, and a “discount fee” of $4,357. The “interest rate buy down” was listed at $15,809.44.

In effect, the Chandlers, who have $172,320 in mortgage debt at 7%, were being asked to refinance to a 6.35% “equivalent rate”--actually an 8.125% rate on the note--in exchange for increasing their mortgage debt to $184,400.

On top of that, they’d agree to be encumbered by nearly $16,000 for the “interest-rate buy down,” payments for which are “already included in the mortgage payment” quoted to them.

For this lower “equivalent rate” package, they’d owe $1,711 a month in mortgage payments--$65 more than the $1,646 they pay now.

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What happened to the $300-a-month savings?

The bank telemarketer who originally called the Chandlers and signed the loan proposal did not return phone calls. Nor did an official at the bank’s headquarters in Illinois.

The Chandlers ultimately did not sign up for the package, but they admit they were intrigued by the idea of replacing their 7% rate with a 6.35% rate.

They say they continue to be disturbed by some aspects of their experience, however.

First, the loan proposal included details of their private credit files: account numbers, balances and monthly payments. The Chandlers say they never signed an authorization allowing the lender to run a credit check, yet the loan proposal included a credit section already filled in with their accounts and balances.

“How did they get that information?” asks Joann. “I think it’s scary.”

Second, several days after they received the proposal--but hadn’t responded--an appraiser called to schedule a visit to check the value of their house.

“We never said we wanted an appraisal,” says Jon. “What’s going on here?”

The bottom line about what’s going on:

Aggressive lenders are marketing refinancing loans to people who don’t need them and are using confusing terms like “equivalent interest rate” to hook the unwary. Be wary.

Readers who receive questionable mortgage offers are encouraged to send copies to Kenneth Harney at P.O. Box 15070, Chevy Chase, MD 20815.

Distributed by the Washington Post Writers Group.