Home Loan Homework

Here's a cheat sheet for those looking to borrow

Perhaps you've been thinking about buying a new house, but have beenwaiting for prices in your area and interest rates to come down. While you can never predict the bottom, prices in many real estate markets look like they're leveling out. Better yet, the Federal Reserve is expected to cut interest rates this year, which will help spur sales and a new round of refinancings.

So it's a good time to review some mortgage basics—no matter if you've been around the block before. "Even the most sophisticated borrowers need to ask a lot of questions," says Bruce Hiatt, owner of Luxury Realty Group in Las Vegas. "It's easy to make assumptions, and often those assumptions are incorrect."


If you'll stay put in the house for as far as the eye can see, a 30-year, fixed-rate mortgage protects you from interest rate fluctuations. Your rate will behigher than with an adjustable rate loan, but your monthly payment will be locked in.

Many recent borrowers who didn't understand adjustable-rate mortgages, with their low teaser rates and payment resets, are still struggling after two years of rates adjusting upward. If in the next few years you either plan to sell the home or expect a pickup in income that will cover higher monthly payments, you should consider a lower-than-market rate at the start. Rick Soukoulis, CEO of LoanCity in San Jose, Calif., a wholesale mortgage banker, says borrowers should insist that the broker calculate the entire cost of all mortgage options, including fees and interest, in various interest rate scenarios.


The Net is a great tool for boning up on mortgage terms and rates. It's also a vibrant marketplace where brokers and Realtors are competing for your business. "Everything is negotiable," says Marc Diana, CEO of Los Angeles-based Leadpoint.com, an online marketplace for mortgages that fields inquiries for Web sites, such as mortgagerate.com and shoplowestrates.com. "The market for mortgages is competitive, so consumers should use it to their advantage." Diana warns that some sites match borrowers with multiple lenders, inundating them with lots of pesky phone calls and few quality offers. Before putting your mortgage out to bid, ask how many lenders will respond. You decide how many calls you're willing to take to get the best deal.


People pay points up front (one point equals 1% of the principal) to lower the interest rate. But a new study finds that home buyers often end up paying more than they would have with no points and a higher rate. After analyzing 3,785 mortgages originated from 1996 to 2003, Abdullah Yavas of Penn State's Smeal College of Business, and Yan Chang, an economist at Freddie Mac, found that fewer than 1.5% of borrowers held loans long enough to make that decision pay off. "We're not saying you shouldn't pay points, but too many borrowers were paying too many points," Yavas says. Say a borrower can pay one point, or $5,000, to lower a 5.375% rate to 5% on a 30-year $500,000 loan. That saves almost $116 a month. You would have to have the mortgage 43 months before you've recouped the points.


It's standard practice for lenders to charge six months' interest on 80% of an outstanding balance if you refinance or pay off the loan within a year and even up to five years. Banks offer better rates on loans with penalties, so if you choose one, know what you're getting into. The danger is when you're speculating with little money down, and the property fails to appreciate. If interest rates go down and you want to refinance, a substantial penalty could wipe out the benefit.

By Mara Der Hovanesian

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