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Using Ads to Shop for Home Financing
Facts for Consumers from the Federal Trade Commission
Using Ads to Shop for Home Financing -- January 1993
For many home buyers, shopping to find the best home financing is
as important as shopping to find the right house. After all, a
small difference in the mortgage rate can make a big difference
in monthly payments.
Many 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 credit
advertising.
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 downpayment (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 information:
l the amount or the percentage of the downpayment (in a credit
sale);
l the terms of repayment (i.e., the amount of the monthly
payment and the length of the mortgage); and
l the rate of finance charge, expressed as the "annual
percentage rate." (See next section for definition.)
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 equivalent of 6%," or simply
"8%," the advertised rate is probably not the annual percentage
rate. The actual cost of the credit 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 rates?
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 downpayment,
leaving $100,000 to be financed. Because of the small
downpayment, 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 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:
l 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.
l 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.
l 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 that at
the beginning.
l 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 credit 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 plans.
You also may wish to request two free publications from the FTC:
Home Financing Primer and Mortgage Money Guide. Write to: Public
Reference, Federal Trade Commission, Washington, D.C. 20580.
11/83; 4/86
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