Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, November 14, 1993 TAG: 9311150234
SECTION: HOMES PAGE: B-3 EDITION: METRO
SOURCE: CHRISTINE DUGAS NEWSDAY
DATELINE: NEW YORK LENGTH: Long
Boles wants to tell the world about new flexible mortgage products that make owning a home possible for more people than ever before. "If someone is paying high monthly rent, there is practically no reason they can't buy a home," she says. "Maybe not right now, but perhaps in six months or so."
The combination of low interest rates and the availability of government loan programs makes this an especially good time to find an affordable mortgage. But before you rush out to take advantage of the opportunity, do your homework.
Too often, prospective home buyers don't even think about the mortgage until they've already picked out a house.
"Making a few panicked phone calls after you've found a home can lead to bad mistakes," says Keith Gumbinger, an analyst at HSH Associates, a Butler, N.J., mortgage research firm. "Your real estate agent may say he or she knows a place where you can get a great deal on a mortgage. Maybe it's true. But if you haven't done some research, you take the chance of getting taken advantage of."
As soon as you've calculated how much you can afford to borrow, start researching mortgages. Talk to friends who have recently gone through the mortgage application process. You might want to attend a seminar on home buying; community groups and banks frequently offer them. And there are services that for a fee can help you shop for a mortgage.
When you select a loan, it's important to consider how long you plan to live in the home. For example, if you're buying a home large enough to accommodate an expanding family, you probably want a fixed-rate mortgage at today's low rates. But if you know that in four years you'll be transferred to another state, an adjustable-rate loan may be best suited to your needs.
If you opt for an adjustable-rate mortgage, or ARM, there are a number of features you will need to evaluate:
The adjustment period. This is the amount of time between changes in the interest rate. Adjustment periods range from six months to five years, but one year is most common.
The index. This is the benchmark rate that lenders use to set ARM rates. Most ARMs are linked to the one-year Treasury note. The important thing is to be sure the index is not too volatile.
The margin. This is the percentage that is added to the index rate each time your loan is adjusted. The total of the two is the rate you pay. These days, margins typically range from 2.75 percent to 3 percent.
The introductory rate. This is the rate you pay for the first period of the ARM. Sometimes lenders offer you a so-called teaser rate, which is arbitrarily set below the rate determined by the index and margin. If you aren't aware you have a teaser rate, you can be in for a shock when the rate is adjusted for the first time.
Caps. ARM loan agreements should place limits on how much the rate can rise or fall when it's time for an adjustment. One-year ARMs are commonly capped at 2 percent a year and 6 percent over the lifetime of the loan.
During the real estate boom, there were many complicated varieties of mortgages, such as balloon payment loans. Fortunately for consumers, Gumbinger says, "plain vanilla" mortgages are the rule today.
If, like most home buyers, you decide on a conventional, fixed-rate mortgage, then you need to choose the term. The longer the term, the lower your monthly payment. As a result, 30-year loans are the most popular. If you can afford the higher payments of a 15-year mortgage, you will save a considerable amount on interest over the life of the loan.
Keep in mind, however, that mortgage interest payments are tax deductible, says Joel Isaacson, a Manhattan financial planner. On balance, some high-income people would prefer a 30-year term because they can invest the money they save from the lower monthly payments and also benefit from the tax deduction.
You also need to consider whether you'd rather pay points up front, or forgo points but pay a higher interest rate. A point is 1 percent of the loan amount and is tax deductible. If the points are added into the loan, they will be reflected in an annual percent rate, or APR, that is higher than the interest rate you are quoted on the loan.
Experts say that each point will add about one-eighth of a percent onto the APR, so that a 7 percent loan with 2 points, for instance, will be equal to a 7.25 percent loan with no points.
When you finally settle on a type of mortgage, the next step is to see what's available. Start by making a list of questions to ask lenders. You need to know about the interest rate, the application costs and points. Be sure to find out if application fees are refundable. And ask about a lender's lock-in agreement, which tells you how long the rate is guaranteed.
Always beware of loans that have penalties for paying off early. And make sure the loan you are considering does not lead to negative amortization - an arrangement that caps your adjustable rate, but makes up for it by increasing the loan size if rates go up.
When shopping around for a mortgage, it's a good idea to check first with the bank or credit union where you normally do business. Robert Heady, publisher of Bank Rate Monitor in West Palm Beach, Fla., recommends consulting five to eight lenders in your area. And you should check with a mortgage broker, because they sometimes offer better deals than banks.
If you don't have much money for a down payment or if you've already been turned down for a mortgage, don't give up. There are government loan programs with flexible rules that are offered through many lenders. Be sure to ask if you qualify for them. Some allow down payments as low as 2 percent. Others have discount rates. A new program introduced last month by Fannie Mae, a federally chartered corporation that purchases mortgages from lenders, has more relaxed rules for obtaining co-op loans.
If you're getting a cold shoulder from banks, you may want to take advantage of free loan counseling offered by ACORN, a nonprofit community group. ACORN counselors not only teach home buyers about mortgage terms and formulas, but they also shepherd the applicant through the loan process.
"We advocate for them and don't let the application die," says Bertha Lewis, director of ACORN's loan counseling program in New York.
by CNB