Can I Rely on Newspaper Ads?

January 22, 2001

"Every Monday the Philadelphia Inquirer runs ads by 30-odd mortgage lenders and brokers showing loan type, interest rate, points, APR, down payment and lock period. The Inquirer receives its mortgage price information from Mortgage Market Information Services (MMIS), which claims to service over 300 newspapers. How reliable is this information?"

Not very. If you want access to price information from a large number of lenders, you do better with one of the mortgage referral sites on the internet. These have limitations as well, but they are not as serious.

I compared the MMIS information appearing in the Inquirer of January 1, 2001with the information on two mortgage referral sites: interest.com (IC), which is MMIS’own site, and compareinterestrates.com (CIR).

Timeliness of information: The Inquirer for Monday shows prices as of Thursday or Friday of the previous week. The staleness grows during the week until the following Monday. In contrast, most lenders on IC and CIR post their prices every day, with the posting date shown for each lender.

Price quotes and loan size: Price quotations always apply to loans in some size range. Loan amounts are shown on IC and CIR but not in the newspaper.

Other factors affecting prices: The price quotations in the press and on the web sites assume you have good credit; are a citizen or permanent resident alien; have sufficient income and assets to meet the lender’s requirements; can document your income and assets; are purchasing a single-family detached house as your primary residence; and will not have a second mortgage on the house when the loan closes. If you don’t meet all of these requirements, prices are higher.

These assumptions are not shown in the newspaper or the web sites.

Points: Points are an upfront charge expressed as a percent of the loan. One point is 1% of the loan. Some lenders charge an origination fee, also expressed as a percent of the loan, which makes them points in disguise.

Origination fees are shown separately by IC and included in points on CIR. Both approaches work. The newspaper, however, ignores origination fees, warning the user about it in a footnote. This reminds me of the football lineman who misses his block and yells “look out” to his quarterback.

APR: The APR is a comprehensive measure of credit cost to the borrower that reflects the interest rate, points, and most other lender charges. In addition, if price quotations specify a down payment less than 20%, the APR is supposed to include mortgage insurance.

Lenders are careful in calculating APRs in connection with mortgage applications, because they can be sued if they do it wrong. When it comes to providing APRs to information service providers, however, they are much more casual. I have found numerous mistakes, all in the same direction (too low), both in the newspaper and on the referral sites.

MMIS shows down payments both in the newspaper and on IC but does not include mortgage insurance in the APR. Yet a footnote in the newspaper states that the APRs “must” include mortgage insurance! Confusion city. CIR avoids this confusion by not showing the down payment.

Junk fees: Most lenders charge fees expressed in dollars, which vary all over the lot. In a survey I did several years ago, junk fees charged by different lenders ranged from zero to $7500! Price comparisons that don’t take account of junk fees can go seriously astray.

IC and CIR show junk fees for each lender. The newspaper does not report junk fees.

Information on adjustable rate mortgages (ARMs): ARM shoppers need to know more than the initial interest rate, which in many cases holds for a year, and in some cases for only a month. They should also know the interest rate index which is used to adjust the rate after the initial rate period ends; the margin that is added to the index to determine the rate; and rate caps, which limit rate changes.

These are all shown by CIR. But the newspaper and IC show only the initial rate and how long it lasts.

Information on prepayment penalties: Neither the newspaper nor the web sites indicate whether or not loans carry prepayment penalties.

Some of these problems in the newspaper ads could be fixed easily and some can’t. Newspapers will never be able to compete with the net in timeliness or in the depth of information provided. They would do better to restrict hard copy ads to general information, and refer readers to their own web sites for timely and detailed price information.