Wednesday, January 4, 2012

My Beef with ING's Mortgage Program & Other Real Estate Nonsense

A few years back, I joined ING Direct as sort of a "hidden" bank account.  It was (still is?) great.  For a while when the husband was "big pimpin'" (he's in construction - so income varies more than a woman's wardrobe), I'd have automatic deposits taken out of our normal bank and into this "hidden" account.  We didn't even realize the money was "missing" and we were able to save up for a new porch and then some.

Well times have changed and I don't have the automatic deductions to that account anymore.  What I do get though is communication from ING Direct .

Although I have enjoyed my experience with ING (I never did a mortgage - just banking) - I think their mortgage products are borderline predatory lending.  They boast this "Easy Orange Fixed Rate Mortgage" on their site (SEE HERE FOR YOURSELF).  Right now an "Easy Orange 5-year" is only 2.75% & an "Easy Orange 10-year" is only 3.875%.  Who wouldn't want a mortgage rate for under 3%?

The problem with this product is that it's not a true fixed rate mortgage.  Sure - it's a "fixed rate" during that 5 or 10 year period - but traditional Adjustable Rate Mortgages (ARMs) are also "fixed rate" during that specialized time frame you pick - 3/1, 5/1, 7/1 10/1 - with the lowest rates being with the lower time period.

The kicker here with ING is that unlike an ARM - when your 5 or 10 year period is up - you owe the remainder of that loan.  So pretty much, it's a balloon mortgage.  With a traditional ARM, your rate just starts to fluctuate depending on the market.  You wouldn't be responsible to pay the the full amount of your loan at the end of your rate lock period with an ARM.

Now after this time, you may not have the remainder $225K or whatever you owe just laying around in a sock drawer.  But ING makes it sound so "simple" - that you can just "renew your fixed rate for another 5 or 10 years for the amount of 1 month's payment".  So the fee to "renew the period" - which may be a much higher interest rate in 5 or 10 years - would be a mortgage payment.  So you are talking at least $1,000 to let ING Direct renew your rate lock.  Plus - look at the economy.  You have no idea if they would even renew you.  What if they don't?  You'd probably be screwed.  If ING won't renew, would a traditional bank?

But you may be thinking "Well, we're just going to buy a starter home and "move up" in 5 years so this would be a perfect product for us."  Which may very well be a great scenario.  Unfortunately, the values of homes aren't rising like they were in the early 2000s when people did make an easy $50K+ off houses in as little as 2 years.  But now, how much equity will you really have in your home after 5 years?

Well let's just say you buy a house for $315,000 and needed a loan for $250,000.  So you go with ING Direct's 5-year deal.  After 5 years of paying off $250,000 at 2.75%, your looking at a payoff amount of about $222,000 - about $28,000 less than your original mortgage.  Sounds great, right?

Then you have to sell your house to "move on up" - so say you are able to sell for $320,000 in 5 years - well at 5% commission - you'll have to shell out $16,000 to your real estate agent (if you find one that will work at 4%, that's $12,800 - although you hear stories of that, it's pretty rare and some still work at 6%).  So at the 5% scenario - your $28,000 profit now becomes $12,000 profit.  If you are "moving up" to your dream home - then you probably do want an actual fixed rate mortgage.  I mean, if you are going to be there until you are dead, or close to it - wouldn't you just like the security of stability?  Well with that - you'll have to bring at least $5,000 for closing costs on your new home (but know that you'll never have to pay fees on that mortgage ever again - except for interest of course) - bringing your "profits" from your starter home down to $7,000.  That kind of sucks, huh?

So what does this mean?  (a.k.a. summary)

1.  If a mortgage lender or your insomnia is telling you something like an ARM or this ING "fixed rate" product is a good idea because you don't intend to stay in your house for very long - you might want to do the long term math.  It might be great depending on your situation (i.e. you expect a big salary increase in that timeframe, you expect to come into some money during that time, your psychic told you that you're going to win the lottery, etc. etc.)

2.  I don't like how ING uses the term "fixed-rate" on balloon mortgages.  Just my personal beef with them.  It's not a traditional fixed-rate mortgage and people with no experience with mortgages or lack a financial background might have zero idea what it all means.

3.  I think it's time our generation thinks like our grandparents' generation.  Why were they smart?  They bought a house and stayed there.  Forever.  Think of your elderly family members.  Think of your elderly neighbors.  What do they all have in common with home ownership?  "They've been there forever!"  They lived within their means and over time, although they grew a ton of equity in their homes - they didn't leave.  They didn't "move on up" to bigger and better things.  They just enjoyed the security of "home".

1 comment:

Anonymous said...

You're obviously stupid and don't understand BASIC mortgage concepts.