WMany consumers learn about
available credit terms for new homes from newspaper
advertisements. But consumers may not know what to look
for when they compare credit terms in home advertisements.
Here are answers to some questions you may have about home
What terms must a home
financing ad contain?
There is no federal requirement that ads for homes provide
information about credit terms. But the Federal Truth in
Lending Act requires that if an ad includes certain credit
terms, such as the amount or percentage of the down
payment (in a credit sale), the amount of the monthly
payment, the length of the loan, or the amount of the
finance charge, it also must include all of the following
- the amount or the
percentage of the down payment (in a credit sale);
- the terms of repayment
(i.e., the amount of the monthly payment and the
length of the mortgage); and
- the rate of finance
charge, expressed as the "annual percentage
If an ad includes any
interest rate, such as the simple interest rate or rates
that apply for a limited period of time, the law requires
that the annual percentage rate also be advertised. If an
ad says "10% financing, the actual cost is likely to
be higher. Therefore, you should ask for the annual
percentage rate and compare terms.
What is the difference
between the annual percentage rate and other interest
The annual percentage rate (APR) includes all the costs of
credit; other interest rates do not. For example, the
"simple" interest rate is the one usually shown
on the mortgage document. It does not reflect additional
costs to cover such items as "points" (fees
charged when the mortgage is closed) or mortgage
insurance. If an ad does not include the APR, it does not
tell you everything you need to know about the cost of
credit. For example, suppose you had to choose between a 9
percent simple interest rate and a 9 percent APR on a
30-year loan. Also, suppose the house cost $110,000 and
you made a $10,000 down payment, leaving $100,000 to be
financed. Because of the small down payment, many lenders
would require you to buy mortgage insurance, often costing
one half of one percent of the loan balance. With a 9
percent simple interest rate, the extra cost for the
mortgage insurance, and other loan origination fees, your
monthly payments might be as high as $841. But with a 9
percent APR, which includes the cost of mortgage insurance
and other loan origination fees, your monthly payments
should not exceed $805. The difference between these two
rates could be $36 a month and thousands of dollars over
the life of the loan.
What should I look for
in ads offering "creative financing"?
Creative financing plans typically include lower payments
in the earlier years of the financing plan, interest rates
that can change during the entire term of the loan, or
some combination of these features. Look for the following
information in the ad, or ask the lender these questions:
- Will the interest rate
or the monthly payments change during the term of the
loan? In some loans, a below-market rate and lower
payments apply only for the first few years, but
higher rates and payments follow for the remainder of
the loan term.
- How will the new
interest rate or the monthly payments be calculated?
The increased rate and payments are stated in advance
in some mortgages. In others, they are tied to certain
indexes and depend on future market conditions. In
these loans, the amount and frequency of the changes
in your interest rate and payments also depends on the
terms of your loan agreement.
- Will the advertised
monthly payments be large enough to pay off the
mortgage? Some mortgage plans offer low monthly
payments even though the interest rate is fairly high.
If these monthly costs are not enough to repay the
loan amount and the interest charges, the difference
may be added to the principal. In some plans, you
could owe more at the end of the mortgage term than at
- Will you have to
refinance the mortgage after a few years? If a large
or "balloon" payment is due after a few
years and you do not have the necessary cash, you may
have to refinance the mortgage. If you do refinance
and interest rates have risen, you may have to make
much higher monthly payments than you had planned.
How can I tell if the
advertised rate includes monthly payments or interest
rates that will change?
Phrases such as "effective rate,"
"adjustable rate," or "flexible
payments" indicate that the credit terms may change.
If you see any of these phrases in an ad, find out more
about the credit terms. For example, if an ad offers a
"7% effective rate," look for other information,
such as the APR, to tell you the full cost of credit.
Where can I get more
information about home financing?
While credit advertising can help you compare financing
plans, it is important to get more detailed information
before deciding on a mortgage, especially if creative
financing plans are involved. It may be worthwhile to
consult a professional, such as an attorney, accountant,
or banker for help in understanding various home mortgage
You also may wish to request two free publications from
the FTC: Home Financing Primer and Mortgage Money Guide.
Public Reference, Federal Trade Commission,
Washington, D.C. 20580.