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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.
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