Life in the Spin

There was a great quote on Commander-in-Chief a couple weeks ago, and yes, I am aware that the wife and I are probably the only ones watching the show. Anyway, the quote was the mother of the President reflecting back on her days as a young ERA advocate and she said something like, “I preferred spin back when they called it lying.”

Honestly, that is how I feel. I hate that people try to make lying okay by calling it spin or damage control. When you are asked a question there are three answers: Yes, No, and I Don’t Know. “Yes” means you tell the truth. “No” means you lie. And “I Don’t Know” means you cannot answer the question and you side step it or put it off until later. It seems that these days “I Don’t Know” is something people are scared to say, and so they’ll try to twist some lie into the truth they think you want to hear.

My most recent encounter with this is with Home Mortgage Loans. If you can’t afford to put a sizable down payment on a house, you’ll likely be offered an 80/20 loan. This means you get two loans, one for 80% of the cost and another for the remaining 20%. The main reason this is done is to avoid Private Mortgage Insurance (PMI). PMI is basically you paying up to a couple hundred bucks a month insurance for the bank so that they don’t get screwed if you default on the loan. Most loan companies have a rule, if your current monthly debt payment plus the mortgage payment is greater than 45% of your monthly income, they won’t do 80/20 with you, they’ll do 100 with PMI. Pretty standard.

Now here comes the “spin”. The loan officer will likely tell you something along the lines of, “Since you don’t qualify for our 45% debt to income ratio, what we can offer you is a 100% mortgage loan, with a slightly higher APR, but a lower monthly payment.” The lie here is two fold. First off, the only reason you get a lower payment (supposedly) is that the loan is likely to be some sort of Interest Only or ARM loan, which means you pay Interest up front, or at least a high percentage of Interest. The payment is lower because the bank is willing to let it be lower since they will be getting “their” money first, because the bank earns its profit in the interest. See, if your payment is Interest Only, you are not paying anything into principle, and this means you don’t really own anything of your house, except appreciation of value. Buy a house at $200k and pay only interest, when you sell it you will still owe the bank $200k. The only thing you get to keep is anything that is left over $200k after all the fees are paid. And if you just did the math… if your house didn’t appreciate in value in excess of the agent commission and taxes, you could actually lose money when you sell your home. Now the second part of the lie… your monthly payment? It will likely be higher. I know what you are thinking, “Didn’t the loan officer just tell me it would be a lower payment?” Well, yes, and technically, in an I’m-an-evil-banker sort of way he’s not wrong. The PI (Principle & Interest) payment will actually be lower on the new loan as opposed to the 80/20, by as much as a hundred dollars a month. But, with the new loan, in addition to the PI, the taxes, and home insurance, you will need to also pay PMI which is likely to be one hundred fifty to two hundred dollars.

So, here is the logic… you fail their ratio, meaning that they don’t believe you are a worthy risk due to your ability to pay, and in return for not making enough money they will force you to pay more. It just doesn’t make any sense to me. Why doesn’t the loan officer just say, “Given the price of the house and the payment schedule, we recommend you find a cheaper house.” At least that would be honest. It is almost like they want you to default on the loan…

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