The Mortgage Industry Encourages Dishonesty

by Dual Income No Kids on August 29, 2006 · 0 comments

Miel and I have shopped for a fair amount of mortgages in our investing career. In our many hours of loan shopping, I’ve reached the conclusion that structural aspects of the business of borrowing money from large lenders encourage dishonesty.

Specifically, for investment properties, lenders charge a higher rate (up to .25 to 1 percent) than for personal residences, and do not require documentation as to the borrowers actual residence. For some loans, this difference can be substantial. For example, if you borrow $300,000 to finance an investment property at 6.25 percent, relative to 6.00 percent (6.00 percent if it weren’t an investment place), you’d pay $41,150 more over the life of the loan.

In these cases, there is tremendous incentive to lie. Why tell the truth and pay an additional $41,150? Whats worse, it seems that if you are dishonest, the loan will still go through. So there aren’t any immediate consequences for being untruthful. In short, the lending industry encourages dishonesty with these policies.

I always feel a bit like a chump when I pay more for investment real estate and I know that others don’t. Fortunately, I’m not tempted very often. Lord knows I have enough problems daytrading and overspending without compromising my integrity to get cheeper loans.

Best,

James

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