- The Washington Times - Wednesday, November 23, 2005

Q:I was recently offered a $375,000, 30-year, fixed-rate, interest-only loan

at 6.75 percent. The loan carries no points, no fees, no balloon and no prepayment penalty. Is this the best deal?

A: There are two ways to answer your question. Is 6.75 percent a good rate for the selected program? Or, is a 30-year fixed, interest-only mortgage the best program for you?

I’ll try to answer both questions.

At the time of this writing, I see that a 30-year fixed loan with an interest-only payment option would carry a rate of 6.50 percent with no points.

But you say that the program carries no fees. Does this mean no lender fees, such as the so-called “junk fees”? These are typically labeled “underwriting fee,” “document preparation fee,” or “loan commitment fee.”

If the loan officer is only referring to the lender fees, expect to save about $500 on your closing cost tab.

Or, does he mean “zero cost,” where the all the closing costs, including appraisal, title insurance, attorney, recording fees, and all other transactional fees are paid by the mortgage broker?

It would be safe to say that 6.75 percent is a competitive rate on a 30-year fixed, interest-only program only if your loan officer is paying all closing costs.

If the offer means “no lender junk fees,” it’s a lousy rate. Depending upon where you live, closing costs, excluding the lender fees, will fall in the range of $2,500.

Your situation illustrates how much misinterpretation, misinformation and misunderstanding there is in the mortgage business. Make sure you clarify what your loan officer means by “no fees.”

Now, let’s address the question of whether or not a 30-year fixed, interest-only loan is the best program. It all depends upon your particular financial situation and goals.

Do you need a loan with an interest-only payment feature? The payment is lower but recognize that paying interest-only means that your balance never drops.

For those folks who are undisciplined savers, an amortized loan is a wonderful way to “save” money by lowering your debt load every month.

It’s also important to realize that if you hold the loan for a long time without curtailing principal, you will eventually have to start paying down the loan at an accelerated amortization plan.

This will cause your payment to jump considerably.

How long do you plan on holding the property? Maybe some type of ARM will better suit your objectives.

Even more important, what kind of mortgage do you currently have?

Rates are at their highest levels in months. Does it even make sense to refinance?

The first thing I ask my clients who inquire about refinancing is the details of their current loan.

You don’t know if Point B is better than Point A if you don’t know where Point A is.

My point is this: You don’t know if a 30-year, interest-only, fixed-rate loan is the best program for you until you sit down with a competent loan officer and establish your objectives, analyze your current mortgage situation and pinpoint the most appropriate loan program.

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

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