I got a postcard from ING today. They are inviting me to convert my mortgage to an “Easy Orange” mortgage at the unbelievably low rate of 3.875%. As with most things that sound too good to be true, this deal almost certainly is. And a quick inspection of their website seems to indicate that ING is hoping that some people won’t realize it.

I’m writing this article because this sort of exact sort of predatory lending that caused the current housing crisis. Enticed by teaser rates and adjustable rate mortgages, people bought more house than they could afford. When the rates adjusted and teaser periods ended, people couldn’t afford the minimum payments. As a result, they lost their homes to foreclosure. This is the exact same animal in different clothing.

First, the postcard: While I normally throw all junkmail in the trash before it even gets through the door, this one caught my eye. I have a pretty great mortgage rate right now, but a rate of 3.875% is worth taking a closer look. So I brought the postcard inside.

At first glance, you’ll note that even though the flyer uses strong sounding terms like “fixed,” this is an Adjustable Rate Mortgage, or ARM. There is absolutely nothing “fixed” about it. Why, ING, are you avoiding terms “Adjustable” and ARM? Why are you only using the term “fixed” when that’s exactly what your mortgage isn’t?

The advertised term is just 5 years, which means that this is a 5 year loan, not a 30 year loan. When those 5 years are up, you’ll owe a lump-sum payment on the balance of the loan,which, according to this mailing, will be around $228,389.01. I don’t know about you, but I don’t have $228,389.01 just sitting around. And while I would like to have $228,389.01 at my disposal in 5 years’ time, I can’t bank on that happening.

“But wait!”, you say. “You can simply refinance in 5 years!” Maybe. I don’t have a crystal ball, so I can’t say what the rate will be in 5 years, but my guess is that most people will not qualify to refinance. Here’s why:

  • The mortgage rate in 5 years time will be higher, probably much higher, than the current market rate, which is darn-near an all time low.
  • As interest rates rise, housing prices fall. This is because housing prices are largely set by what people can afford to pay each month. Since household income is not going up, and since interest rates will undoubtedly rise, a larger percentage of a homebuyer’s monthly payment will be going towards interest. Ergo, housing prices will continue to fall.

Not only will the rate be higher in 5 years, but you probably won’t even qualify to refinance, since you will be upside down on your home loan.

I went to the website listed on the mailing, and clicked on the “What does this mean” link.

Here is the text that is displayed:

What does the projected rate and payment mean that’s listed next to the current rates for Easy Orange?
The government requires us to display this information. So what does it mean? Easy Orange has a fixed rate and bi-weekly payment for 129 payments (a little less than five years). After that the remaining balance is due. Keep in mind, at that time you may qualify to renew your rate for another 5 years at the current Easy Orange rate.

(Emphasis mine.)
Now there’s a weasel word for ya – “You may qualify to renew your rate.” Not that you will, but you may. Yeah, and who knows, in 5 years I may be a famous Hollywood star. You never know. Hell, I just may.

But wait, there’s more. Clicking on the “learn more” link on the same page, I learned the following:

At the end of the 5-year term, your remaining balance is due to be paid back. At any time after the first six months you can use the Rate Renewal feature to renew your rate – all for one payment which is equal to 2 of your bi-weekly payments. You get our best Easy Orange rate at that time (fixed for 5 years) without having to pay full closing costs and you receive the security of another 5 years fixed.

This statement is vague. “After the first 6 months” refers to the first six months after the rate expires, not the first six months after receiving the loan. They’re telling you that after 5 years, you have the option of paying them $1,200 for the privilege of renewing your loan at whatever rate they happen to be offering at the time. Might be 10%. Might be 20%. Who knows. But make no mistake – they’re not offering you any ‘deal’ here – they’re telling you that you are free to buy something from them again, at whatever price they happen to be selling it. Just like any other customer.

This is like Walmart saying, “And as added benefit, since you’re such a loyal customer, when you run out of those Cheezy Doodles come and back and we’ll sell you some more, at whatever price we happen to be selling them for at the time.” Not a benefit. Not a deal. Just clever distraction to dupe you into giving up your secure 30-year rate for a measly savings of a few thousand dollars or so over the first 5 years. In other words, you take on all of the risk that rates will not rise, and you get very little of the reward.

Now, don’t get me wrong – there are some people for whom this mortgage may make sense. Just like there are some people who benefit from interest-only 40 year mortgages. They’re a very small percentage of people, and they know what they’re doing. For the most part, these people are seasoned financial veterans with loads of experience and matching loads of cash flow. ING is those people. And unless you’re one of them too, do yourself a favor and throw this “offer” in the trash.