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Those tricky mortgage rates: beware the small print in mortgage agreements

Black Enterprise, Sept, 1995 by Gracian Mack

You've decided to ditch that closet your landlord calls an apartment, and buy a house. As you begin to look around, you find you have a dilemma. The broadcast news quotes mortgage interest rates at 7%, but the newspaper ad carrying a picture of your dream house quotes a rate of 8%, followed by three mysterious initials, APR. What's going on?

The standard quote for interest rates is for fixed-rate, 30-year conforming, or conventional loans. The rate quoted by mortgage companies and their representatives refers to interest paid on the amount owed but ignores the additional costs associated with securing a mortgage.

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But the annual percentage rate (APR), which is defined by the truth-in-lending laws, includes other costs, such as points, which are fees that lenders charge for making mortgages. A point equals 1% of the total amount of the loan. One point on a $200,000 mortgage is $2,000.

Often a mortgage lender is willing to bargain over whether a borrower should pay more points and a lower interest rate, or fewer points and a higher interest rate. In June, for example, the Municipal Credit Union of New York quoted a 30-year conventional mortgage at 7 1/8% with two points, 7 3/8% with one point, or 7 5/8% with no points. The quoted market rate will help you figure out how much your monthly payment will be. The APR will tell you how much you will actually end up paying.

And now about fees. To avoid confusion, we're going to stick with conventional loans (no adjustable rate mortgages, no balloons). When the loan officer pushes the application across the desk, it will probably have a list of fees buried in fine print. Excluding closing costs, which occur at the final stage of title transfer, some of those fees are necessary and some may be just padding.

If your application doesn't have all the fees associated with the transaction spelled out, demand complete disclosure from the lender. You must leave the office knowing exactly how much and what you are paying for.

Normal fees include: Credit reports, which shouldn't cost more than $50; property appraisals, which can run between $250 and $400 and may or may not include additional charges for home inspections and title searches; and loan application charges. Other fees might include:

* A charge for processing your application. Direct lenders, such as banks, may waive this fee.

* Tax and insurance escrow fees. Insurance is usually required for mortgages with down payments of less than 20%. Funds in escrow accounts, usually held in a bank, assure mortgage lenders that real-estate taxes and fire insurance will be paid on time.

* Interest proration, the amount of interest that accrues between the time the mortgage is funded and the time that the first month's interest is paid.

* Lenders title insurance, which assures the lender that there are no outstanding liens on the property.

You should fight some fees because the underlying costs should be borne by the lender. These include:

* Loan origination fees, which could amount to an additional point or more. When negotiating the mortgage, you should either be charged an origination fee or points--not both.

* Document fees. You should not be charged a fee merely to fill out a form.

* Underwriters fee, which covers the cost to the lender of pooling your mortgage with others and selling interests in the pool in the secondary markets as a mortgage-backed security. This is the lender's responsibility, not yours.

* Commitment fees and loan evaluation fees. These are charges for insuring against rising interest rates and for assessing loans. Try to avoid them.

* Lock-in fees, which are usually demanded when interests rates are expected to rise. You pay to lock-in the more favorable, or lower, rate. You should know exactly how long the lock-in period will last.

The best way to settle on a lender or mortgage loan is to shop around. Remember, a slightly lower rate on a long-term mortgage can mean tens of thousands of dollars over the life of the loan. Generally, a borrower pays far more in interest than he or she does for the house itself.

Get quotes from newspapers as well as from different lenders. Also, talk to family and friends who already own their own homes. They may help you avoid many of the horrors that can turn pursuing your dream house into a nightmare.

Those tricky mortgage rates: beware the small print in mortgage agreements

Black Enterprise, Sept, 1995 by Gracian Mack

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