On the radio in our car, the first two programmed buttons are set to NPR and to a local talk radio station that features a decent amount of local programming.
Over the past few years, on that latter station, there have been quite a few ads for home loans, either new mortgages or refinancing. These ads always lead by touting the “low, low rates” they’re offering right now, and the rates that they tease you with certainly do sound good.
A few times, the rates have been so low that I’ve followed up on them with some research. Are they really offering rates that low?
Well, they are, but those rates are often supported by a ton of fees and other costs that really jack up the true rate you’re paying.
For example, one loan offer I examined offered a brilliant 3.5% interest rate. It sounded great.
The catch, though, is that the wonderful interest rate they quote doesn’t account for the fees they charge. At the example I looked at, the estimated fees on a $200,000 loan added up to almost $8,000.
If you were really getting a 3.5% loan for $200,000 over 30 years, you’d pay $323,312.18 over the lifetime of the loan. Yep, that’d be $123,312.18 in interest.
However, if you had to also tack on that extra $8,000 in fees, you’d be paying $336,244.66 over the lifetime of the loan, consisting of the $200,000 loan, the extra $8,000 in fees, and $128,244.66 in interest. Your “real” interest rate is somewhere around 3.84%, not the 3.5% promised in the ad.
Some ads actually tell you the rate and then sneak in the true APR you’ll be paying. They’ll say something like “3.5% with an APR of 4.22%” or something like that. Ignore the teased rate and pay attention to the other rate, because unless you have the cash up front to pay for all the fees, you’ll actually be paying the higher rate.
In fact, my experience has shown me that the businesses that tease you with the lowest rate often have the highest fees. You need to ask them what their actual APR is after accounting for all of the fees to really figure out what the best deal is for you.
What can you do? Shop around. Don’t just refinance or get a mortgage or a car loan from the first place you talk to. Doing some groundwork can shave at least 0.25% off of the rate you’re actually going to pay, and with a large mortgage over thirty years, that adds up to thousands of dollars.
Know what the fees are and how they’ll affect your total bill. The teased rate that financial institutions will try to sell you is often only a part of the story.
This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere. Images courtesy of Brittany Lynne Photography, the proprietor of which is my “photography intern” for this project.