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.
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
down payment (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 down payment (in a credit sale);
- the terms of repayment (i.e., the
amount of the monthly payment and the length of the
mortgage);
- 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.
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 down
payment, leaving $100,000 to be financed. Because of the small
down payment, 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.
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.
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.
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