Leader Advertising in the Mortgage Industry

1) The No Closing Cost Loan
Let's think logically about the "no closing cost" loan. Do you know an attorney that works for free? How about an appraiser? Perhaps state and local taxes will be waived because were nice people. Title fees, processors, underwriters, monthly escrows and much go into putting a mortgage together REGARDLESS of who you choose as your lender. The “No closing cost loan” should be called the “we hide your closing cost in an inflated rate loan”. The truth is ALL mortgages have fees associated with them, if you do not pay them the lender or broker must.

The way the lender gets money to pay these 3rd party fees is by generating a  “yield spread”. They charge you a higher rate than you qualify for and receive a premium from the investor they intend to sell the loan to in the form of “points”. Sometimes a “no closing cost loan” is wise; for example, if you have $3000 of closing cost and you are planning only to be in the property for only a year or two, you will probably profit from taking a higher rate in lieu of the fees.

The problem with this scenario is that most lenders will require you to have a pre-payment penalty on loans of this nature. If you plan to be in the property for a longer period of time you are simply transferring fees into an interest rate, this will cause you lose money exponentially over the life of the loan and the bank makes huge profits. This is why we have named the “No Closing Cost Loan” the number one leader advertisement.

2) Flat Fee Loans
See the above paragraph, the only difference is the mortgage lender is advertising a one-fee loan and rolling the difference into the rate. Ditech is particularly fond of this ploy.  “$495 lender fees!” as a loan officer I spend an inordinate amount of time explaining their leader advertising. Have you ever seen the 2 paragraphs of disclaimers that follow these leader advertisements? They are simply taking a junk fee and advertising it.

All lenders have junk fees, these are fees that are do not represent a third party, i.e. an appraiser but represent an overhead or profit to the lender. Look at the bottom of these flat fee advertisement, it says” excludes third party fees, taxes, escrows and any other incidental cost. Well that pretty much wraps up all the usual closing cost in the disclaimer, now just add $495 and you have a loan.

3) $175,000 Loan for $475 per month
This is typical leader advertising. Ask yourself this question, do you want a loan that starts with one rate and triples 90 days later? How about an interest rate that will change every month or every 6 months? What these advertisers are doing is, taking a one-month ARM (an adjustable rate mortgage that fluctuates every month) that has a teaser rate (a rate that is designed to get you into the property with a lower payment) and telling you this can be your payment.

The truth is, this is a volatile loan, it is calculated on one of the indexes, usually the LIBOR, and is formulated of the margin + index. So if your margin is 3.0% and the index is 4.75%, after your initial teaser period your payment would almost triple. These loans have some uses; for instance, investors who are purchasing a property to renovate and flip may like this option. However, marketing this product to mainstream mortgage purchasers is pure leader advertising; they know perfectly well most people n in their right mind would not want this mortgage.

4) When Lenders Compete
When lenders compete you win! How many times have you heard this? The fact is, this is not leader advertising, but it has reached a viral magnitude on and off line and bears explaining. Here’s how it works: each time you fill out an application you are converted to a “lead”. From there you are sold to several mortgage companies who “compete” for your business. Each company pays around $35 bucks for your information plus a funding fee. This funding fee is expressed as a percentage of the loan, averaging $400 - $800 bucks depending on the loan amount. Guess who pays this additional cost? I will give you a hint, not the lender.

When lenders compete advertising is not a bad thing, however it does employ “the middle man” as it creates convenience. Most people are simply too lazy to sit down and analyze their situation and the market then pick an appropriate lender that fits their needs. They would rather have three or four lenders call them with outrageously low quotes then systematically tell them why they do not qualify for them. The truth is this: when banks compete you loose money but gain convenience.

5) Compare Mortgage Rates
I don’t know if we would call this leader advertising as well, but it is definitely an advertising medium that is used to get you to visit a websites and apply online. Here is how it works: first we build a web site, let’s call it “Lender-Interest-Rates.com.” Next we have to get people to visit our web site. So let’s put up some nifty free stuff life mortgage calculators, free advice and free downloads. Now we have traffic, so let’s put some rates up. Where do we get our rates though? Do we post the real interest rates as dictated by the 10-year bond market and the prime lending rate? No!  This would not allow us to post the lowest rates and give the appearance saving you money.

I have it, we can charge Mortgage Companies to advertise their “lowest rates” on our website and that way we can have the appearance of lower rates and let the mortgage companies explain to the customers why they don’t qualify for those rates when they call. The fact is: on your top “Mortgage Rate and Fee” website they charge upwards to $1000 per month to list rates and fees on their website. In my younger days as a loan officer I once paid these fees in an attempt to find customers. What I found is good guys finish last!

I advertised my rates and my fees as to what an average loan would cost and guess how many calls I got for my $1000 bucks. None! The companies that got all the phone calls were the ones advertising unreal rates and misrepresenting their fees. I did learn a very good lesson for my $1000 bucks though. I learned to find customers the old fashioned way through realtors, builders and referrals. You can learn a lesson too, these websites that list their rates and fees are usually listing the most unlikely scenario available and will attempt to move you to a more profitable loan that has higher rates and fees when you call. Don’t forget, they also have to recoup that hefty advertising fee they pay each month.