Contracts 101: The Big Words Giveth, and the Small Words Taketh Away

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Many years ago I was a buyer for a large pharmaceutical company. My boss had worked at the company for many years, and was a man of great experience. As he taught me to negotiate contracts, he constantly reminded me of this one eternal truth–read the fine print. As he put it, “the big words giveth, and the small words taketh away.” Well, that advice is as true today as it was 20 years ago.

A few days ago I received in the mail an offer for what appeared to be a really low interest rate on a mortgage. And the offer was from Countrywide Home Loans, who seemed to me to be a reputable mortgage company. The letter was promoting a “Payoption ARM.” Here is what the big print giveth:

At first glance, this doesn’t look so bad. A $750,000 loan for just $2,025 per month. But the first suggestion something could be wrong is in the fine print below which says, “minimum payment may result in deferred interest.” In other words, the minimum payment of $2,025 would not be enough to cover the monthly interest, so your loan balance would be going UP each month, not down. Turning to the really small print, things get even worse. Here it is:

The fine print is so small, you probably can’t even read it. Well, here is what it says:

• The initial interest rate is 1.25%
• The Annual Percentage Rate (APR) is 7.69%, which tells you that 1.25% teaser rate won’t last long
• Closing costs are estimated to be $8,000
• After the introductory period, the interest rate adjusts monthly!
• The interest rate on the loan can go as high as 11.95%
• Montly payment could go as high as $4,145

It still amazes me that a mortgage company would advertise this kind of loan package. You’ll see them use words such as flexible and four payment options. But the result is the same–a dangerous home loan for consumers. Buyer beware–read the fine print! Or as the sergeant in one of my favorite 1980s drama series would say, “Let’s be careful out there.”

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