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.


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