Using
Ads to Shop for Home
Financing |
_{
}For many home buyers,
shopping to find the best home financing is as important as shopping to
find the right house. After all, a small difference in the mortgage rate
can make a big difference in monthly payments.
Many consumers
learn about available credit terms for new homes from newspaper
advertisements. But consumers may not know what to look for when they
compare credit terms in home advertisements.
Here are answers to
some questions you may have about home credit advertising.
What terms must a home financing ad
contain?
There is no federal requirement that ads for homes provide information
about credit terms. But the Federal Truth in Lending Act requires that if
an ad includes certain credit terms, such as the amount or percentage of
the downpayment (in a credit sale), the amount of the monthly payment, the
length of the loan, or the amount of the finance charge, it also must
include all of the following information:
* the amount or the
percentage of the downpayment (in a credit sale);
* the terms of
repayment (i.e., the amount of the monthly payment and the length of the
mortgage); and
* the rate of finance charge, expressed as the
"annual percentage rate." (See next section for definition.)
If an
ad includes any interest rate, such as the simple interest rate or rates
that apply for a limited period of time, the law requires that the annual
percentage rate also be advertised. If an ad says "10% financing," "the
equivalent of 6%," or simply "8%," the advertised rate is probably not the
annual percentage rate. The actual cost of the credit is likely to be
higher. Therefore, you should ask for the annual percentage rate and
compare terms.
What is the difference between the
annual percentage rate and other interest rates?
The annual percentage rate (APR) includes all the costs of credit;
other interest rates do not. For example, the "simple" interest rate is
the one usually shown on the mortgage document. It does not reflect
additional costs to cover such items as "points" (fees charged when the
mortgage is closed) or mortgage insurance. If an ad does not include the
APR, it does not tell you everything you need to know about the cost of
credit.
For example, suppose you had to choose between a 9 percent
simple interest rate and a 9 percent APR on a 30-year loan. Also suppose
the house cost $110,000 and you made a $10,000 downpayment, leaving
$100,000 to be financed. Because of the small downpayment, many lenders
would require you to buy mortgage insurance, often costing one half of one
percent of the loan balance. With a 9 percent simple interest rate, the
extra cost for the mortgage insurance, and other loan origination fees,
your monthly payments might be as high as $841. But with a 9 percent APR,
which includes the cost of mortgage insurance and other loan origination
fees, your monthly payments should not exceed $805. The difference between
these two rates could be $36 a month and thousands of dollars over the
loan.
What should I look for in ads offering "creative
financing"?
Creative financing plans typically include lower payments in the
earlier years of the financing plan, interest rates that can change during
the entire term of the loan, or some combination of these features. Look
for the following information in the ad, or ask the lender these
questions:
* Will the interest rate or the monthly payments
change during the term of the loan? In some loans, a below-market
rate and lower payments apply only for the first few years, but higher
rates and payments follow for the remainder of the loan term.
*
How will the new interest rate or the monthly payments be
calculated? The increased rate and payments are stated in advance in
some mortgages. In others, they are tied to certain indexes and depend on
future market conditions. In these loans, the amount and frequency of the
changes in your interest rate and payments also depends on the terms of
your loan agreement.
* Will the advertised monthly payments be
large enough to pay off the mortgage? Some mortgage plans offer low
monthly payments even though the interest rate is fairly high. If these
monthly costs are not enough to repay the loan amount and the interest
charges, the difference may be added to the principal. In some plans, you
could owe more at the end of the mortgage term that at the beginning.
* Will you have to refinance the mortgage after a few years?
If a large or "balloon" payment is due after a few years and you do
not have the necessary cash, you may have to refinance the mortgage. If
you do refinance and interest rates have risen, you may have to make much
higher monthly payments than you had planned.
How can
I tell if the advertised credit includes monthly payments or interest
rates that will change?
Phrases such as "effective rate," "adjustable rate," or "flexible
payments" indicate that the credit terms may change. If you see any of
these phrases in an ad, find out more about the credit terms. For example,
if an ad offers a "7% effective rate," look for other information, such as
the APR, to tell you the full cost of credit.
Where
can I get more information about home financing?
While credit advertising can help you compare financing plans, it is
important to get more detailed information before deciding on a mortgage,
especially if creative financing plans are involved. It may be worthwhile
to consult a professional, such as an attorney, accountant, or banker for
help in understanding various home mortgage plans. |