Q: I have just signed a contract to buy a house and am trying to shop around for a mortgage. I realize that lenders cannot "unit price" money the way supermarkets do with coffee and sugar. But what are the possible charges, such as interest and points, that I should ask about? When is an 8.75 per cent loan with no points better than an 8.5 per cent loan with one or two points?.
A: You really should look at a mortgage the way you compare the cost of groceries. There are extra charges imposed by some lenders. Comparison shopping does make sense even in the real estate market.
Let's look at some of the items which go into your cost of "buying a loan." Clearly, the interest rate is the most important item to consider. Rates range in the Washington metropolitan area from lender to lender, and also depend on the amount of your own payment. For example, if you put down 25 per cent or more of the total purchase price, you will receive a lower loan than if you only put down 10 per cent. On the other hand, you may want to put down as little money as possible into your house, using the rest of your available cash for other things, such as repairs, furniture, or even other investments. Additionally, your lender may charge you a point or two as a condition of obtaining the loan. A point is one per cent of the value of the loan. Thus, if you obtain a $55,000 loan , one point will be $550.00.
Are you better off paying one or two points and getting a lower interest on your mortgage, or taking the higher rate without the point? Only you can make this determination, since it depends on a number of factors, including how much available cash you have at settlement, and what tax bracket you are in. Also, if you plan to sell the house within a short period of time, you would probably be better off paying the higher interest rate, since you really won't have to pay it for too long a period.
For example, you are obtaining a $55,000 loan, for 30 years. The monthly payment based on an 8.75 per cent rate is $432. The same loan, based on an 8.5 per cent rate, will cost you $423 per month. Thus, the higher interest rate will only cost you approximately $9 more a month, and yet at the same time it will save you putting up cash at settlement in the amount of $550, which is one point. It will take you five years of $9 extra monthly payments to catch up to the extra point.
Don't be too concerned about the higher interest rate. You should be equally as concerned about the so called front-end costs, such as points, appraisal fees, lender's inspection fees, amortization table fees, and such similar charges.
The Real Estate Settlement Procedures Act, enacted by Congress, requires your mortgage lender to give you a "good faith estimate" of all of the closing costs required in connection with your mortgage loan. This document, which you should get no later than three days after making a written application for a loan, is a valuble tool for comparison shopping.
Unfortunately, Congress can only give the consumer the necessary tools to shop around. It is up to you, as the consumer, to take advantage of these opportunities.
Benny L. Kass, a Washington attorney, answers questions through this column. Write him in care of the Real Estate Section, The Washington Post, 1150 15th ST. NW, Washington 20071.