- The Washington Times - Thursday, January 13, 2005

The complicated maze home buyers must navigate as they apply for a mortgage can be intimidating. It seems impossible to comprehend the terms — points, APR, PMI — let alone the variety of mortgage programs currently available.

And the stakes are high. For the vast majority, the purchase of a home is the largest investment they will make, and the equity they build in their home provides a lifelong sense of financial security. This is, after all, a large part of the American dream.

Realtors and bank officers say they want to demystify the mortgage process. They agree that many of the basic terms and issues need to be broken down and explained in plain language.

Realtor Theo Theologis of RE/MAX Allegiance in the District says he tells clients to consider the entire financial package, including the annual percentage rate.

“Everyone just focuses on the interest rate, and ignores other things,” he says. “I’ve never seen anyone be concerned about the APR, which is surprising.”

Mr. Theologis says the APR includes points, origination fees and other finance charges, in addition to the interest on the mortgage, in one yearly rate.

The APR is usually higher than the interest rate alone. It also provides a benchmark for comparing types of mortgages based on the annual cost for each loan.

“Don’t just look at the rate; look at the whole package,” Mr. Theologis says.

Another term buyers need to understand is the FICO score, a number that credit-reporting agencies assign to individuals based on their credit history. The trademarked acronym FICO comes from Fair Isaac Corp., which developed this measure of a person’s creditworthiness.

The Fair Isaac Web site, www.myfico.com, reports, “Your credit score is a number based on the information in your credit file that shows how likely you are to pay a loan back on time — the higher your score, the less risk you represent.” The site offers free FICO score calculators and other educational materials.

“I always tell people the best money they can spend is to get the credit report,” Mr. Theologis says. “It determines your creditworthiness.”

The FICO score affects what kind of loan you’ll get. The better your credit, more programs will be available from which you can choose.

After obtaining your credit report and determining the state of your credit, the next step is to take the report to a mortgage lender to be preapproved.

Carolyn Tabb, vice president of Bank of America’s Bethesda office, says buyers often are confused about the difference between the terms “pre-qualification” and “preapproval.”

She says she often receives calls from customers saying, “‘OK, this is my salary, and this is what I owe — what can I afford?’”

Although Ms. Tabb records these details, she completes calculations that are rough estimates only, without verification of the facts.

“Preapproval” actually occurs when the buyer fills out the formal application and gives the lender authorization to scrutinize his or her credit report.

The lender verifies all income, assets and debts, and then drafts a letter to show that the buyer is preapproved.

This letter is then provided to a Realtor, who will attach it to an offer.

Ms. Tabb says preapproval can be critical: “There is such a great demand for housing in our area that if you are preapproved, the seller is more likely to give your offer consideration.”

Ms. Tabb says that she doesn’t mind going over these definitions and details with her clients and that it’s easier to talk about buying a house when they already have the basics down.

“It helps a lot when going over the good-faith estimate,” she says. “Then it doesn’t sound like total Greek to them.”

Points are another term that can add to frustration once an offer is made and a good-faith estimate is given.

“Some don’t understand that they may pay a point for a lower rate, but that point may cost them more in the long run,” Mr. Theologis says.

Points are defined as prepaid interest on a mortgage and are usually paid at closing. Each point is equal to 1 percent of the total amount of a mortgage. (One point on an $80,000 mortgage is $800, or 1 percent of $80,000).

Most lenders offer mortgages with several combinations of points and interest rates. Generally, the lower the interest rate, the more points you will pay at settlement.

Buyers need to do the math and determine if the extra points paid upfront will save them money in the future.

Senior loan officer Samilia Anthony with National City Mortgage Co. in the District says that, in addition to understanding basic terms, buyers need to investigate the specific type of loan that works best for them.

“Usually, I tell them to let us know their situation and I can tell them what we offer,” Ms. Anthony says. She says buyers should know that a mortgage is a unique product for each buyer, so the options they will be offered may be very different from what their friends or relatives might have received.

“So many times, I hear, ‘Well, so and so got a 5 percent rate, and I want that,’” Ms. Anthony says.

The mortgage process has become even more intricate as lenders develop various loan programs.

“We can’t tell everyone the same thing,” Ms. Anthony says. “It’s not generic anymore. The bottom line is that every year, the programs change and get to be more detailed. Now, people are finding a house and, up until closing time, may be finding what’s right for them.”

Bob Armbruster, current president of the McLean-based National Association of Mortgage Brokers, says he strongly advocates educating the public about the mortgage process.

He points out that the industry is producing more ads and promoting its products more than ever.

“Part of it is education — they need to know what the steps are, what the processes are and what programs are available,” he says.

Before focusing on the applicant’s individual needs, Mr. Armbruster says, it is critical that the customer clearly understand the four basic types of mortgages: fixed-rate mortgages; fixed for a period of time, or hybrid adjustable-rate mortgages; adjustable-rate mortgages; and interest-only loans.

He says this is the first step in answering the most frequently asked question: “What kind of program am I best suited for?”

m In a fixed-rate mortgage, the interest rate remains the same for the entire period of the loan.

m With an adjustable-rate mortgage, the interest rate changes periodically, according to corresponding fluctuations in an index. One such index that has been in the news lately is the London Inter-Bank Offering Rate, but the prime rate or Treasury bill indexes are also among the most commonly used ARM indexes. All ARMs are tied to indexes.

m A hybrid mortgage, also called a fixed-period ARM, features aspects of both fixed-rate and adjustable-rate mortgages. A hybrid loan starts out with an interest rate that is fixed for a period of years, and then the loan converts to an annual ARM. Sometimes this is referred to by the number of years that the loan has its lower fixed rate, followed by the years that the rate is adjustable, as in 5/1, 7/1, and 10/1 ARMs. In these hybrid ARMS, the rate would be fixed for five, seven and 10 years, respectively, and would adjust annually after that.

• An interest-only loan is different from the others because the client pays only the interest, not the principal, on the loan.

So why choose one type of loan over another? Why not just go with the lowest payment?

Some buyers won’t feel comfortable with a pending large payment at the end of a 5/1 ARM, and so might opt for a long-term, fixed-rate mortgage in which the rate stays the same across the life of the loan.

Studies show, however, that most homeowners move within five years of buying a house, so buyers who plan to move in five years can choose a lower-rate 7/1 ARM, for example, knowing they will not face the end of the loan.

All programs fall into these four primary types, and buyers should consider which type of loan will be best for them.

“Everything else is an offshoot,” Mr. Armbruster says. “Once you explain the different types of mortgages, you can really [home] in,” on meeting people’s needs.

The other major concern prospective homeowners have is the financial responsibility of the mortgage.

“They want to know: ‘Can I do it? Can I afford to buy a house?’” says Doug Perry, senior vice president with Countrywide Home Loans in Calabasas, Calif.

He says the reality is that there are well more than 100 mortgage products to choose from, so the goal is to narrow it down to two or three viable solutions.

“If they can come to us with their financial goals and objectives, we can come up with a solution,” Mr. Perry says.

He encourages mortgage shoppers to take advantage of lenders’ expertise and come in and meet with one to ask questions and gather facts about the mortgage process — and the product that will meet their specific needs.

“The entire process is misunderstood,” Mr. Perry says. “Get access to an expert. Lenders are anxious to talk to customers, with no obligation.”

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