AD HOME LOAN
WHAT TO LOOK FOR WHEN COMPARING HOME LOAN ADS
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 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); 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 others?
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. Ifan 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. However, 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 you should 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 to 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 is 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, real estate agent,
accountant, or banker for help in understanding various home mortgage plans.
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Information provided by this website is general and is not a substitute for professional
advice. Please consult your investment advisor and/or attorney before entering
into any transaction.