The One Percent Refinancing Myth

The phone rings, and the cheerful woman on the other end of the phone line begins to chirp the benefits of a one percent interest refinance. While this might sound like an amazing deal to many people, I politely thank her and hang up. The one percent loan is a half-truth at best. It is a myth that is carefully cultivated to ensnare those who are not in the know, and it works. Here’s how.

One percent mortgages are also interest-only, meaning that you don’t pay more than the one percent interest of the loan every month. Obviously, this means that if you are making the minimum payments, then you are not making any progress on paying down the loan. This is fine if you are buying a place just to turn around and sell it again, but not so great if you are trying to make it your own.

Some companies will also insert a clause in your loan package that states that you cannot make more than your minimum payment without being charged a fee to do so. This is unnecessary and harmful, especially on an interest only loan. It means that not only do you not have to pay the loan itself over time, you also get charged to make payments to it. This is unhealthy if you are planning to keep the house for any length of time.

This next part is the real secret – the ones that these refinance companies don’t want you to know. While you are being charged interest and billed at the rate of one percent over the lifetime of your loan, your loan is actually accruing interest at a more normal rate, such as six or seven percent.

What does this mean to you? It means that your loan is actually getting bigger and bigger, and you will be charged a hefty fine if you make a payment to try to bring it down. You are gaining interest on your loan at a rate of five or six percent since you are only paying one percent of the interest. This trap is one that leads dangerously down the road to financial ruin for many people.

Even worse? Many of these companies also include a clause that imposes another hefty fine if you attempt to refinance with different terms than the ones that they have set. You become trapped in a loan that is growing instead of shrinking over time, and you can’t even pay it down. This kind of loan is like poison for the inexperienced home owner.

The next time the phone rings and a telemarketer asks you if you want to save money on your home loan, your best bet would be to put down the phone and walk away. After all, you want to own the house, not serve it up to them on a platter. You should know that one percent loans are no more than a half-truth, and no good for home owners.