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©
2002 Ruth E. Campbell. |
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Frequently Asked Questions Mortgages
- Q & A Q: Where are interest rates headed?
A: No one knows for sure where rates are headed. Beyond
public policies put in place by the Federal Reserve Board, there
are no laws that govern mortgage rates. Historically, usury laws
were used to prevent lenders from charging sky-high interest rates
when lending money. But in some states where there are usury laws,
banks, thrifts and a number of other financial institutions are
exempt from the law. Today, interest rates are governed solely by the financial
markets and by Federal Reserve Board action, neither of which
can be predicted with absolute certainty. Q: How do you lock in an interest rate?
A: Locking in a mortgage rate with a lender is one way
to ensure that same rate still will be available when you need
it. Lock-ins make sense when borrowers expect rates to rise during
the next 30 to 60 days, which is the usual length of time lock-ins
are available. A lock-in given at the time of application is useful because
it may take the lender several weeks or longer to prepare a
loan application (though automated loan practices are cutting
this time dramatically). However, some lenders require borrowers to pay lock-in fees
to assure particular rates and terms. Be sure to check that
the rates and points are guaranteed and that your lock-in period
is long enough. If your lock-in expires, most lenders will offer
the loan based on the prevailing interest rate and points. Lenders may have preprinted forms that set out the exact terms
of the lock-in agreement. Others may only make an oral lock-in
promise on the telephone or at the time of application. Resources: * "A Consumer's Guide to Mortgage Lock-Ins,"
published by the Federal Reserve Board and Office of Thrift
Supervision, Washington, D.C. Q: How do you choose between fixed and adjustable rates?
A: There is risk involved in selecting an adjustable
rate mortgage, or ARMs, because rates may go up. On the other
hand, a fixed-rate loan offers good protection against rising
interest rates but the borrower is stuck with the initial rate
if interest rates drop. Statistics show that home buyers who have chosen Arms since 1981
have saved thousands of dollars. For a period, the percentage
of home buyers applying for Arms rose substantially, then buyers
and homeowners began flocking to fixed-rate loans. Whether to opt for a fixed or adjustable rate mortgage is a
matter of personal choice. The first route offers stable payments;
the second offers lower initial payments. Another consideration is the length of time a buyer plans to
own the home. If you're planning on moving within three or four
years, an ARM makes sense even if rates do nothing but rise
during that period of time. Q: What are rates for FHA and VA loans?
Q: How do you get a low-interest rate loan?
A: Price discounts and interest rate buydowns are common
incentives offered by new-home builders trying to overcome slow
sales. Buydowns are a financing technique used to reduce the monthly
payment for the borrower during the initial years of the loan.
Under some buydown plans, a residential developer, builder or
the seller will make subsidy payments (in the form of points)
to the lender that "buy down," or lower, the effective
interest rate paid by the home buyer. State agencies often offer lower rate loans. But to qualify,
borrowers usually must be a first-time home buyer and meet income
limits based on the median income level of their county. Q: How are the rates set for seller financing?
A: The interest rate on an owner-carry loan is negotiable.
Ask your agent to check with a lender or mortgage broker to
determine the current rate on institutional first (or second)
loans. Seller financing typically costs less than conventional financing
because loan fees (points) typically aren't charged. The interest
rate on a seller-carry loan will also be influenced by current
Treasury bill and certificate of deposit rates. Sellers usually
aren't willing to carry a loan for a lower return than they
would earn if their money was invested elsewhere. Q: What are the most popular ARM indices?
Q: Are interest rates negotiable?
A: Some lenders are willing to negotiate on both the
loan rate and the number of points but this isn't typical among
established lenders who set their rates like large corporations
set the prices on their goods. Nevertheless, it pays to shop
around for loan rates and know the market before you go in to
talk to a lender. You should always look at the combination
of interest rate and points and get the best deal possible. The interest rate is much more open to negotiation on purchases
that involve seller financing. These usually are based on market
rates but some flexibility exists when negotiating such a deal. When shopping for rates, look for published rates in local
newspapers or check the growing number of Internet sites that
publish such information. Q: How do adjustable-rate loans change?
A: Adjustable-rate mortgages go up and down with interest
rates, based on several esoteric money market indexes which
cause the cost of funds for lenders to vary. Several popular
indexes include Treasury Securities, Certificates of Deposit,
and Libor (London inter-bank offering rate). Most big city newspapers
publish ARM index rates. The interest rate and payment adjustments do not always coincide.
There is usually a lag. There are a variety of consumer protections
built into these loans. But consumers need to beware of advertising
and other claims made by lenders. Resources: * For more information, consult the "Consumer
Handbook on Adjustable-Rate Mortgages," available from
the Federal Reserve Bank of San Francisco Public Information
Department, P.O. Box 7702, San Francisco, CA 92120; (415) 974-2163. Q: Where can I get adjustable-rate loan info?
Q: What is APR?
A: The Annual Percentage Rate (APR) is the relative
cost of credit as determined in accordance with Regulation Z
of the Board of Governors of the Federal Reserve System for
implementing the federal Truth-in-Lending Act, according to
Charles O. Stapleton III, Thomas Moran and Martha R. Williams,
authors of "Real Estate Principles," 3rd Ed., Dearborn
Financial Publishing, Chicago; 1994. The APR is the actual yearly interest rate paid by the borrower,
figuring in the points charged to initiate the loan and other
costs. The APR discloses the real cost of borrowing by adding
on the points and by factoring in the assumption that the points
will be paid off incrementally over the term of the loan. The
APR is usually about 0.5 percent higher than the note rate. Q: How do I monitor my ARM loan?
Q: What is the value of a mortgage lock-in?
A: Locking in a mortgage rate with a lender is one way
to ensure that same rate still will be available when you need
it. Lock-ins make sense when borrowers expect rates to rise during
the next 30 to 60 days, which is the usual length of time lock-ins
are available. A lock-in given at the time of application is useful because
it may take the lender several weeks or longer to prepare a
loan application (though automated loan practices are cutting
this time dramatically). However, some lenders require borrowers to pay lock-in fees
to assure particular rates and terms. Be sure to check that
the rates and points are guaranteed and that your lock-in period
is long enough. If your lock-in expires, most lenders will offer
the loan based on the prevailing interest rate and points. Lenders may have preprinted forms that set out the exact terms
of the lock-in agreement. Others may only make an oral lock-in
promise on the telephone or at the time of application. Resources: * "A Consumer's Guide to Mortgage Lock-Ins,"
published by the Federal Reserve Board and Office of Thrift
Supervision, Washington, D.C |