You could find yourself paying too much for your home mortgage loan

September 27, 1992|By James M. Woodard | James M. Woodard,Copley News Service

You may be paying too much for your home mortgage loan.

For starters, don't fall for every promotional line touted by lenders who are vying for your business. For example, those "no points, no fees" loans could cost you thousands of extra dollars ++ over a few years.

Those loans typically carry an interest rate that is from three-fourths to seven-eighths of a percent higher than a similar loan where the borrower pays the normal points and closing costs. With this higher interest rate, the lender can sell the loan to a secondary loan buyer, such as the Federal National Mortgage Association, for a price that is considerably higher than he would receive for a conventional mortgage loan.

That increased price the lender receives -- or "fee premium," as he calls it -- often is about 3 percent of the total loan amount. That's more than enough to cover the cost of the points and fees. In other words, the lender often collects additional profit by selling these loans that appear on the surface to save the borrower money.

The typical no-points, no-fees mortgage loan, financing the purchase of a $150,000 home, will generate a fee premium for the lender of about $3,600 due to the increased interest. That's enough to cover costs of points and fees and boost the lender's profits.

That's great for the lender, but bad news for the borrower if he continues to own the home for more than a couple of years. The higher interest rate could cost the borrower thousands of extra dollars over the long term.

In most cases, it's far better for a borrower to pay the upfront points(usually from 1 to 2 percent of the loan amount in most areas) and fees when the loan is closed, and benefit from the lTC lowest possible interest rate. It pays to analyze the figures carefully when considering a new mortgage loan.

Here's another scenario where you may be paying too much:

If you are paying on a home mortgage loan that includes a surcharge for private mortgage insurance, you can have that surcharge removed from your payments when the mortgage balance lowers to 80 percent of the current value of your home -- but only if you request it from your lender.

Typically, when a home is financed with a conventional loan that is more than 80 percent of the home's value, the lender will require PMI coverage. That will cost the borrower about three-fourths of a percent of the loan amount for the first year (payable at closing) and three-eighths of a percent per year thereafter, paid with the regular monthly payments.

That monthly charge will continue throughout the term of the loan, unless you take action. When the loan amount reaches no more than 80 percent of the home's value -- by the loan balance being reduced (amortized down) by your payments and/or the home's value increasing -- contact your lender and request that the PMI surcharge be removed. At this point, the loan-to-value ratio of the mortgage is low enough to make the loan sufficiently secure for the lender without the insurance coverage.

If you are basing your request on the premise that your home has appreciated in value, you may have to invest a small amount for an appraisal of your property, but that may be a wise investment.

Q. What's the most popular type of mortgage loan to finance a home purchase?

A. This varies from area to area, and there are more "loan types" now being offered by lenders. Generally, the 15-year fixed-rate mortgage has become popular in many areas -- for homebuyers and homeowners refinancing their existing loan.

"In many cases, we are refinancing a homeowner's existing 30-year mortgage loan with a new 15-year loan, and keeping the monthly payments at about the same amount," one mortgage banker reported. "This is possible because of the lower interest rate."

Q. What happens when a homeowner loses his job and can't make his mortgage loan payments anymore?

A. We directed that question to a major mortgage lender. His response:

"When a borrower loses a job or encounters other problems that make it impossible for him to make his full mortgage payments, we try to work out a special temporary plan for him," he said.

"This may mean cutting his loan payments by as much as half the usual amount for a period up to 18 months if that's what it takes to help him get back on his feet. The unpaid interest is added to the loan balance."

If the problem becomes more serious, the borrower is urged to sell the home before foreclosure becomes a necessity, he said.

"In some severe cases, we may have to take title to the property, but will rent it to the original homeowner. We feel it's important to work things out in a way that is most helpful to the borrower. We want to avoid a hostile foreclosure."

Questions may be used in future columns; personal responses should not be expected. Send inquiries to James M. Woodard, Copley News Service, P.O. Box 190, San Diego, Calif. 92112-0190.

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