Home sweet home: footing the bill

Black Enterprise, March, 1995 by Gracian Mack

Back in the days when life was slower, owning a house was a simple matter of finding a spot, chopping the wood, stacking the stones and voila--you had a home. In today's complex world, however, the multitude of home-buying choices can be a bane or blessing.

Unless you and Wheel of Fortune's Pat Sajak are very good friends, you're probably going to pay a mortgage. A mortgage is an agreement between you and a lending institution. The lender fronts you the money to move in, holds the deed and accepts regular payments plus interest to repay the loan. Your mortgage can carry a fixed or variable rate, but in either case, if you miss a certain number of payments, the lender forecloses or seizes the property.

Your financing choices include banks or savings and loans, credit unions, mortgage companies or mortgage brokers. Except for mortgage brokers, all lending sources are regulated by some state watchdog, like the Office of Thrift Supervision or the Federal Credit Union Administration. The mortgage broker, however, exists without supervision.

If you go to a bank, you'll probably pay the highest interest rate. Last December, according to the Bank Rate Monitor, a fixed-rate 15-year mortgage issued from a bank carried an interest rate of 8.64%; a 30-year mortgage, 9.04%; and a one-year adjustable rate mortgage, 6.44%. Savings and loans, on the other hand, were charging 8.56%, 8.98% and 6.39%, respectively.

Banks have the most conservative lending policies, which means more people apply for loans than there are applicants who actually get approved. "People usually get turned down because of bad credit or lack of substantial income," says Sunny-Brent Harding, president of Harding & Harding, a credit counseling firm in Boston. If you do get rejected at a bank, make sure you know why. "Get the loan officer to lay out exactly what's stopping you from qualifying," she explains. "Ask them what you have to do to qualify--do that and then reapply."

Maybe you don't want to return to someone who has already turned you down. In that case, see if your job, church or even your alumni association has a credit union. Credit unions typically offer lower rates than banks and S&Ls, but participation is limited to members.

Another option is mortgage companies that lend money from their own coffers, sell those loans to third-party investors and then keep track of payments, taxes and other fees. Mortgage companies typically have lower interest rates than banks, and they can match loans to investors because they have a wider range of mortgage products.

For example, instead of either a fixed- or variable-rate mortgage loan, a mortgage banker may design a combination--a loan with an interest rate that is fixed for anywhere from 3 to 10 years, and is then adjusted annually.

Last October, according to the Bank Rate Monitor, mortgage companies were charging 8.87% for a 30-year fixed-rate mortgage. In contrast, a one-year ARM was 5.64%. Sounds great but remember, since you're charged less in interest, you'll be charged more in principal payments.

Finally, there are the mortgage brokers. "Mortgage-brokers are a last resort," says Harding. Mortgage brokers are the ultimate go-between. They do not make loans. They cannot guarantee you a loan. They can let your request bobble on the surface of the lending pool until someone takes a bite. They will charge you anywhere from 1 to 4 points more than any other lender, simply because you are in need.

"When dealing with a mortgage broker," says former mortgage broker Herbert Riggs, now a consultant at Boston's nonprofit Dudley Street Neighborhood Initiative, ask, "What is the fee? Who pays the fee (you or the lender)? What is the total itemized down payment? If I don't get the mortgage, do I get any or all of my money back?"

Remember, the more you sidestep the mainstream, the more you'll pay and the greater your chance of losing it all.