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Carefully Compare ARM Financing

March 06, 1994

In the article by Robert J. Bruss "Making 'Best' Choice When Refinancing," (Dec. 26) he makes many good points. However, the relatively short description on adjustable rates mortgages may lull the reader into a false sense of security in believing he is now "ARMed" with sufficient knowledge. Three warnings seem appropriate.

Bruss indicates that the best way to choose loans is to "shop," comparing annual percentage rate (APR). Deceptive APR advertisements of ARM loans, although unlawful, are unwittingly carried by nearly every newspaper. Thus, APR shoppers should compare any too-good-to-be-true quote (today, anything less than 5.5%) to those of at least five major financial institutions.

Unfortunately, even legitimate APR calculations still assume today's historically low variable interest rates will remain unchanged for 30 years. Thus, shoppers who anticipate owning the loan for more than four years should also obtain and compare a second "downside scenario APR." This computation should reflect a 2% annual increase in the underlying index, thus incorporating the effects of lifetime interest rate caps (which can range from 9% to 14%), periodic rate caps, as well as full negative amortization, if applicable.

Bruss also notes that he favors the 11th District cost-of-funds index for ARMs. However, comparison using either of these two APR computation scenarios will quickly reveal that most such 11th District COF loans are worse than say, a six-month CD or one-year Treasury indexed loan.

DEAN ALTSHULER

Los Angeles

The writer is an investment consultant.

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The annual percentage rate (APR) can be a valuable tool to help you shop for a mortgage, but only when you know how to use it. An APR measures the total cost of the loan (including interest, points and fees) and compares this cost to the amount you borrowed. You could call an APR the "effective" interest rate because points and fees are also included.

The tricky part of using APRs is knowing when you're comparing "apples vs. apples." To start with, you'll need to make sure that all APRs are calculated using the same loan amount. Without doing this, it's impossible to make any meaningful comparison between two or more APRs. Therefore, beware of APRs in advertisements that do not divulge the loan amount.

In terms of strategy, there are two steps in the use of APRs that will give you good results. First, you should begin shopping for a mortgage by using a list of lenders rates where the APRs have been calculated using the same loan amount, such as that shown in the Mortgage Rate Report in The Times Real Estate section. Use this list to narrow down your search to a group of four or five lenders that have the best rates. Second, call each lender and have them calculate an APR for your loan amount and all applicable fees for your loan offer. This approach will give you comparable APRs and a good bottom-line measure of which loan offer is the better one.

EARL PEATTIE

Mortgage News Inc.

Santa Ana

Peattie is president of Mortgage News Inc., which produces the Mortgage Rate Report for The Times.

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