Saturday, September 16, 2000

Comparing mortgages pays off

Points, other expenses affect final cost

By Jeff McKinney
The Cincinnati Enquirer

        Hunting for a home mortgage? In today's volatile interest-rate environment, you'd better shop around.

        That appears to be particularly true in the Tristate with mortgage rates consistently higher than the national average, although Cincinnati is one of the nation's most competitive banking markets. But appearances can deceive.

    Tristate mortgage rates are consistently higher than the national average primarily because rates are figured differently.
    The national average rate on a 30-year fixed-rate mortgage this week was 7.88 percent, according to Freddie Mac. The average rate on a 30-year, fixed-rate mortgage locally was 8.14 percent, according to the Cincinnati Area Board of Realtors.
    The reason for the difference: Freddie Mac's survey of lenders includes one point, which is an upfront payment of 1 percent of the mortgage amount (two points would be 2 percent and so on). The Cincinnati survey does not include points.
    Here's the difference that makes on the monthly payment on a $220,000 30-year, fixed-rate mortgage:
    • At 7.88 percent, the monthly payment, with no mortgage insurance, would be $1,595.92.
    • At 8.14 percent, the monthly payment on that same loan would be $1,635.80.
    Consumers should consider whether it's worth paying $2,200 upfront to get the Freddie Mac mortgage. The Freddie Mac borrower would save $39.88 monthly compared with the payments at the 8.14 percent rate, but it would take about 4 1/2 years to recover the upfront investment.
   Source: Tristate Mortgage, Enquirer research

        Thirty-year fixed-rate mortgages locally have hovered just above 8 percent since late November, while the same rate nationally has dipped below that level in recent weeks. Cincinnati-area mortgage rates have seesawed since September 1999, dropping as low as 7.86 percent Nov. 15 and rising as high as 8.70 percent May 22, the highest level in about five years.

        The average for a 30-year fixed mortgage was 8.14 percent this week — the lowest since it hit 8.12 percent Sept. 4, according to the weekly survey by the Cincinnati Area Board of Realtors.

        Nationally this week, the average for a 30-year fixed loan was 7.88 percent, down from 7.94 percent the previous week, according to a weekly survey by the Federal Home Mortgage Corp., or Freddie Mac.

        Some of the volatility is tied to actions by the Federal Reserve, which has raised interest rates six times since June 1999 to slow the economy. Those actions have resulted in a slowdown in consumer spending and home sales, two key economic indicators.

        So why are the rates in Greater Cincinnati consistently higher than the national average?

        That's something Jim and Pat Stern of Sycamore Township have pondered for years. It's also why, when the couple married in 1997 and decided to buy a new home, they checked out lenders locally and nationally, sought assistance from friends and scanned the Internet before deciding where to obtain a new mortgage.

        “We just wondered why the rates published were different from week to week,” said Ms. Stern, 44, a Cincinnati cable executive and cost-conscious consumer.

        Mortgage executives say the answer is simple: The Cincinnati Area Board of Realtors and Freddie Mac use different measures to set the weekly average rate on mortgage loans.

        The main difference is 125 lenders surveyed by Freddie Mac include 1 point — which is 1 percent of the loan amount — to determine the rate. The 26 Tristate lenders surveyed by the Cincinnati Area Board of Realtors do not include points.

        Consumers can pay points upfront to get a lower interest rate, but in doing so, they raise their out-of-pocket expenses. Points are figured on the loan amount, not the sale price.

        For example, on a $100,000 mortgage, 1 point equals $1,000. But lenders often offer a discounted interest rate that can range from 0.25 percent to 0.375 percent, depending on the lender and loan amount.

        Points are prepaid interest, meaning a borrower who pays points gets the lower interest rate. Borrowers who don't pay points get a higher rate, but their out-of-pocket costs are lower, and they pay the interest as they go.

        Dan Brady, owner of Tristate Mortgage in Montgomery and a 20-year local mortgage executive, said points explain the difference between the national and local mortgage surveys.

        “They're not apple-to-apple comparisons,” he said. “Adding a point directly impacts the interest rate.”

        Eileen Fitzpatrick, a spokeswoman at Freddie Mac, one of the nation's largest mortgage lenders, agreed. She said many consumers figure they're being overcharged when they see a local lender advertise a rate higher than the national average.

        “That's just not the case,” Ms. Fitzpatrick said. “People need to ask whether the rate includes any points or not.”

        Cincinnati-area mortgage rates are very competitive with most other major markets nationally, said Richard Bondie, mortgage lending director at Fifth Third Bank, Cincinnati's largest home lender.

        He said many lenders nationally add a point when figuring mortgage rates, possibly explaining why Freddie Mac includes that number in its survey. He said that minus that calculation, the average mortgage rates locally and nationally would be similar.

        For example, Freddie's Mac average rate this week of 7.88 percent on a 30-year fixed-rate mortgage would be 8.13 percent with no points. The average rate in Cincinnati this week with no points was 8.14 percent.

        “We're in line with other parts of the country,” he said.

        But the bottom line for consumers is to shop around.

        Ms. Stern said she and her husband found a 30-year mortgage that carried an interest rate of 6.85 percent after contacting several Tristate banks. They wanted to obtain a mortgage locally to increase their “comfort level.”

        But Ms. Stern said that while the rate was attractive, she was more concerned about what the out-of-pocket costs would be. The Sterns were able to obtain a mortgage with expenses of about $500.

        “When you get down to the nitty-gritty, it came down to what the initial cost would be, not just the interest rate,” she said.


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