Every day I see ads in the paper for real estate loans that are almost too good to be true. The deals that are too good to be true always have an asterisk and small print down at the bottom. The small print is exactly the same as the small print disclaimer on a television ad that is on the screen for one second. It is obviously impossible to read the small print on the TV ad unless you have a VCR and ‘freeze frame" the ad itself. Ironically, as I write this article about newspaper ads, the Federal Trade commission is looking into the problem of impossible to read TV advertising disclaimers. Unfortunately, the larger newspapers continuously refuse to reject advertising that has a huge interest rate such as 2.9% and a tiny APR such as 8% or even no APR at all. It is indeed unfortunate that these publications KNOWINGLY accept misleading advertising and, in effect, help defraud their readers.

The purpose of this column is to try to persuade you to ignore the big print and IMMEDIATELY put your glasses on and read the fine print carefully. In most cases you will then be mad at the advertiser for even making you take the trouble to read the fine print. There is nothing new about this problem and there is no recent surge in misleading ads. For decades we have had a federal "Reg Z" or truth in lending law that requires, among other things, that an annual percentage rate be displayed equally prominently with the stated interest rate. I have mentioned APR before; it simply calculates the additional loan fees and costs charged on a loan.

Though I see these ads daily, today’s ad was quite large and too good to be true. Frankly, there is nothing illegal or immoral about this ad, however the small print is so different from the stated interest I felt it was time to run a "small print" column. Again, I am not picking on this lender, I am just using this as a common example. The ad I am referring to is for a second trust deed. Equity loans, lines of credit and home improvement loans are usually all second trust deeds. What caught my eye today was an interest rate of less than 6%. Less than 6% for a second trust deed is OBVIOUSLY a ‘teaser rate." This has to be a "teaser rate" because the same company offers a first trust deed at approximately 7¾%.

The APR stated in the ad was above 9% but it was done properly, in the same size and style type. Again, the purpose of this article is to train you to drop directly down to the fine print when you see a loan rate that is too good to be true. In this particular case, the loan is variable, which I only recommend if you will be in the house for a few years. In the long term, this could be devastating. Unfortunately, the "teaser rate" is only good for the first three months and will then adjust EVERY MONTH, based on an index and a margin. Though the index used and the margin are quite fair, the true loan cost (APR) could be as high as 18%. This loan has other small print that, frankly, even I didn’t FULLY understand.

Many second trust deeds (conventional lenders) have a fixed interest rate at 8-9% and they are usually 20± year fully amortized loans. Therefore it would be common to see an interest rate quoted at approximately 8% and, perhaps, an APR quoted at 9-10%, depending on fees and costs.

Is this a terrible loan? Not necessarily. If you are living in a house and need money to fix it up and then sell it or need money to fund a business venture which FOR SURE will pay off in a year or two, this loan might be one that I would even recommend. On the other hand, if you are going to live in the property for 10-20 more years, the thought of an 18% interest rate should have you do your own laundry before someone "takes you to the cleaners."

Though this has turned into a discussion of fixed interest versus variable interest, I really had intended it as a discussion of READ THE FINE PRINT. When you see an interest rate of 2.9%, 4.2%, 5.9% or some other great rate, look for the APR (annual percentage rate). In the small print you may find 10% or 11% and then you will realize the low "teaser rate" doesn’t mean a thing.

In closing, remember the fine print. If you can read this you are on your way to becoming a professional "fine print reader."

Peter Rosenthal
VIP Trust Deed Company