- The Washington Times - Wednesday, December 20, 2006

Q:I have a $379,000 mortgage on a property worth about $500,000. The best offer I

received from a lender was 8.70 percent with 1.50 points. The total closing costs, including the points, add up

to $9,000.

The loan officer told me that my credit score, which is below 550, was preventing me from getting a good rate.

I have four questions:

• I constantly receive phone calls and mail solicitations that say I can get a 1.50 percent mortgage. I assume this is a bait-and-switch tactic. Am I correct?

Given my credit score, is this the best offer I am likely to receive, and should I accept it?

• Is there any advantage to a 40-year fixed-rate loan, compared to a 30-year loan?

If we decided to sell this property, would it make sense to take cash out and make improvements that buyers get excited about, such as a kitchen renovation? Or is it best to sell “as is” quickly and buy another property before prices go up?

A: Once a borrower’s credit score falls below about 640 or 630, he is less likely to qualify for the most competitive mortgage programs. This is why you have been quoted a rate that is clearly higher than today’s market rates for “A” credit borrowers.

Let me back up and answer all your questions in order.

• You are correct. No home loans are currently available at a 1.50 percent interest rate. The “1.50 percent” rate that is advertised is not the interest rate, it’s a payment rate. The actual interest rate on these programs is closer to 8 percent. The payment doesn’t cover the interest charged, so the mortgage balance increases every month. This is called negative amortization. Stay away from these kinds of offers.

• A borrower with a credit score below 550 will not qualify for “A” credit mortgage paper. I don’t have enough specific information about your situation to be able to tell you if the lender’s offer is the best available. However, 8.70 percent with 1.50 points is well above market rates.

It would certainly make sense to consult with another lender. I might recommend that you ask a family member, neighbor or other trusted source if they have had a good experience with their mortgage company. Seeking out a good recommendation is a great way to increase your odds of finding a reputable mortgage broker or lender.

• The only advantage of a 40-year loan, compared to a 30-year loan, is a lower payment. In your case, your payment would be about $130 more under a 30-year program.

However, the 40-year plan will carry far more interest cost over the life of the loan. I see from my calculator that although the 30-year loan is $130 more per month, the loan balance drops by $25,000 more over the first 10 years of the loan.

• Making improvements that appeal to a prospective buyer is always a good idea. However, it’s crucial that the cost of improvements doesn’t exceed the value that you create.

Updating a kitchen is a great example. Updating with modestly priced modern appliances and cabinetry will create value, but adding top-of-the-line, hugely expensive appliances will often diminish the return.

Henry Savage is president of PMC Mortgage Corp. in Alexandria. Reach him by e-mail (henrysavage@pmcmortgage.com).

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