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Knock 17 years off of your mortgage – really?
We receive calls from clients all the time asking about ads they heard on the radio or saw on the Internet. Some of my favorites are the ads claiming “Pay your loan off in 13 years without increasing your mortgage payment”. You think to yourself, “How can this be, I can pay my mortgage off in 13 years and not increase my monthly mortgage payments?” Of course your instincts tell you there must be a catch – and you are right.Deceptive advertising.

This sounds too good to be true because it is too good to be true. Unfortunately there are some legal loopholes with mortgage advertising which allow companies to make such unbelievable claims. The statement is a true statement, but they are leaving out a very important detail - you need to make about six extra mortgage payments per year for 13 years! Note, technically speaking your monthly mortgage payment on paper is not increasing so they can say it is still the same and the advertiser gets away with this deceptive ad.

Down Under
Recently there has been a surge of advertisements making the above claims if you use a new mortgage program which is popular in Australia. Once again, many of the important details are being left out.

This program is basically a Home Equity Loan with an interest rate 1 ½ to 2% higher than current fixed rates. The program suggests the borrower sweep all of their disposable income towards the loan each month to reduce the mortgage balance and thus avoid paying some interest. In the end, all the borrower is doing is prepaying on their mortgage. A borrower could do the same thing with a current fixed rate mortgage and prepay any extra disposable income towards their mortgage. However, the rate on the fixed rate mortgage will have a lower interest rate so the mortgage will be paid off even sooner.

To help sell this program lenders are using software models to show how you can pay your mortgage off in 13 to 14 years, instead of 30 years. In most cases, the assumptions used in the computer model, such as the amount of disposable income you will be able to apply towards the mortgage, are unrealistic. On top of this, sometimes there are fess as high as $3,500 for the software program. Save your money by utilizing one of the free mortgage calculators common on the Internet to see what happens if you prepay your mortgage.

1.75% Interest Rate?
Ads claiming incredible rates like 1.75% are true statements, but typically true for only the first month. As soon as the second month of the loan the rate will start to adjust each and every month. At the time of this writing the new monthly rate would be around 7.25%. That's about 1% higher than a current fixed rate mortgage.

New Legislation to Help Protect the Consumer
September 4th of this year the Colorado Department of Real Estate, which now oversees most mortgage companies in Colorado, instituted a new disclosure called the “Colorado Tangible Net Benefit Disclosure”. One of the best parts of the disclosure is the requirement that the new mortgage needs to have a net benefit to the borrower.

Specifically the form states the mortgage company will have a duty to the consumer. “Such duty includes the duty to not recommend or induce the borrower to enter into a transaction that does not have a reasonable, tangible net benefit to the borrower, considering all of the circumstances, including the terms of a loan, the cost of a loan and the borrower's circumstances."

The form highlights several possible negatives of certain mortgage programs. Some examples are - does the new mortgage have Interest Only payments or does it have an Adjustable Rate? The borrower is required to physically initial or mark "N/A" for each possible negative. Plus, both the borrower and the mortgage company are required to acknowledge the new loan will have a net benefit to the borrower.

The disclosure is still too new to know if it will help reduce bait and switch tactics or deceptive advertising. My guess is companies will think twice before taking a person out of their fixed rate to put them in a monthly adjustable with a 1.75% teaser rate.

Ask questions and read the small print
Your home is most likely the largest purchase you will make in your lifetime. When choosing which mortgage program makes the most sense for your financial situation, take your time, read the small print and be sure to use a reputable mortgage company.

Understanding credit scores
A Credit Score, officially known as a FICO Score, uses a proprietary mathematical formula developed by Fair Isaac Company to predict an individual’s likelihood to meet his/her financial obligations. A separate FICO score is calculated for you by each of the three national credit bureaus – Experian, Equifax and Trans Union. They calculate your FICO score based on the following credit categories:

· Past payment performance (35% of total score)
Do you pay your bills on time? Consider two things: 1) Being 90 days late on a payment is considerably worse than being 30 days late. 2) The more recent the infraction, the faster your credit scores drop. According to one credit bureau, a 30-day late payment today will hurt your score more than a bankruptcy five years ago.
Tip: Always pay on time, even if the balance is only $10.00.

· Credit utilization (30% of total score)
Do you charge the maximum limit on your credit cards? If your credit balance is spread between 3-4 credit cards rather than a higher balance on 1-2 cards, you most likely will have a better credit score.
Tip: The general rule of thumb is to keep your balances below 30% of your maximum credit limit.

· Credit history (15% of total score)
How long have you had credit? The longer your credit history the better. Newly opened accounts (credit cards, loans, etc.) with high balances may reduce your score.
Tip: Avoid opening a lot of new accounts, even if you pay them in full every month.

· Inquiries (10 % of total score)
Do you authorize anyone to inquire on your credit history? Applying for new credit may lower your credit score. However, multiple inquires for the same types of credit (like a mortgage) within a 14-day period are viewed as only one inquiry.
Tip: Decide which financial institution you plan to go with and then let only them run your credit report.

· Types of credit in use (10% of total score)
Do you accept every offer for credit? Loans from high-risk finance companies can impact your scores more harshly than a loan from a bank or mortgage company.
Tip: Revolving debt is less favorable compared to installment loans.