When the telemarketer says ‘refinance'—hang up

Every day, we get a half-dozen calls and letters offering the Pike family once-in-a-lifetime opportunities to refinance our home mortgage at low, low interest rates.

“You’ve been selected to receive HomeLoanCenter.com’s exclusive SmartLoan program,” one recent letter boasts, offering loans of up to $600,000 at interest rates from 1 to 4.27 percent.

Exclusive! No fees! “Just give us a call and start saving.”

We bought a new house in east Sparks two and a half years ago. Our home’s value has nearly doubled since then. We’d not have been able to afford our house if we hadn’t bought then. That’s a dilemma facing wannabe home owners as the concept of the “starter home” becomes increasingly elusive. A home in our median-income neighborhood recently sold for around $420,000. Gasp.

That’d mean a 20 percent down payment of $84,000. Monthly payments (at 6 percent interest) would run around $2,000.

Hence the appeal of refinance plans that offer to cut payments in half. Unfortunately, many of these scams are as useful to your family finances as sliding twenty dollar bills into Megabucks.

On Saturday, we received a letter from TransAmerican Mortgage offering us a plan called “TheSavingsMaximizer.” (All one word for increased edginess?)

The company knows exactly how much we owe on our mortgage. It promises to save us between $780 and $1,040 monthly. The low interest rate sounds terrific: 1.750 percent (APR 4.655 percent). The monthly payment is “fixed” for five years.

It’s a clever rhetorical move, using the words “fixed” and “interest” in the same paragraph. The company wants us to believe that the interest is “fixed” at the low, low rate of 4.6 percent. Read the letter again, and you’ll find no such promise of fixed interest—only fixed payments.

Low fixed payments and flexible, rising interest rates add up to trouble. The lender will be piling that unpaid interest on to the loan every month. Paying down the principal? Forget about it.

After five years of making house payments that don’t even cover the interest on the loan, homeowners would owe more than they did at the start. They could even lose their homes when payments lurch back to above normal at abysmally high interest rates.

Predatory lenders that take advantage of home ownership dreams, bury families in debt and make hefty profits from foreclosures were the subject of two bills under consideration in Congress.

“While … many community development organizations are focused on helping borrowers build wealth through homeownership, some unscrupulous lenders are siphoning that wealth away,” testified Martin Eakes, the chief exec of Self-Help and the Center for Responsible Lending. Eakes supports HR 1182, a bill that offers strong consumer protections. Mortgage bankers prefer HR 1295, a more industry-friendly version.

At my house, we aren’t opposed to a legitimate refinance before interest rates begin to rise again—though between prepayment penalties, points and broker fees most lenders lean toward rapacious. HR 1182, by the way, reduces the time a lender can extend a prepayment penalty to 30 months—from five years.

Working the system requires self-education and research. Know who you’re dealing with. The Federal Trade Commission is hunting for Phil Ranney, an alleged fraudster who ran about a dozen faux mortgage companies from one office in Colorado. He’s accused of a complex con that bilked more than a thousand homeowners out of their savings by offering no-fee refinance loans. Complaints against Ranney have been filed in Nevada, California and Illinois.

In the meantime, my family plugs away on our fixed-rate loan. The house will be paid for in 2032.