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Knowledge Is Power for the Borrower

March 29, 1998|ELLEN JAMES MARTIN | SPECIAL TO THE TIMES

Shopping for an outstanding deal on a mortgage is akin to seeking out the best terms when buying a car, according to home loan experts.

"In both cases, you have to know what questions to ask and be sure to negotiate," says Eric Cunliffe, who has been in the home loan business for 27 years.

The U.S. mortgage industry is fiercely competitive, with more than 5,000 companies in the field.

Such intense rivalry for profits presents both opportunities and challenges for borrowers, said Cunliffe, president of AmeriNet Financial Systems Inc., which provides mortgage services through realty offices across the United States.

Although sharp borrowers have increasing bargaining power with their lenders, naive consumers are more vulnerable to the possibility that "junk fees" may be added to their loan charges, Cunliffe said.

The time to compare lenders' terms is well before you close on the house, before it's too late to get the unwarranted charges removed.

"If you're an inexperienced consumer buying real estate, you'll be especially intimidated and afraid to rock the boat right before closing," Cunliffe said.

Here are four secrets to scouting an exceptional mortgage deal:

No. 1: Cuddle up to a "HUD 1" form.

The federal government, through the U.S. Department of Housing and Urban Development, provides a standardized form for use in residential property closings. It's known as the HUD 1 form, a document smart mortgage shoppers should get to know.

(A blank HUD 1 form should be available through the HUD Web site at www.hud.gov or from your real estate agent, your lender or the office that will close on your home purchase.)

The HUD 1 form must reveal all the charges the borrower is asked to pay at closing. Most borrowers don't see a completed form until they reach the closing table. But if you obtain a blank copy of the form before you commit to a particular lender, you can use it as a negotiating tool, Cunliffe said.

Why? Because the so-called junk fees some lenders charge have to be listed in a particular section of the HUD 1 form. If you know where the "miscellaneous" lender charges are noted, you can ask for a written guarantee from the lender that he'll impose no fees in that particular section.

What names do the junk fees go under? Most are known by a variety of vague titles, such as "underwriting fees" and "document preparation fees."

One lender had the audacity to charge extra for the color photos used in the appraisal report, for which the home buyer had already paid several hundred dollars, Cunliffe recalled.

When they're used, such fees typically add $300 to $350 in expense for the average home buyer, according to Cunliffe, and occasionally they'll add several thousand dollars in cost.

True, buyers are entitled to a good-faith estimate of all the charges they will face after they have applied for a loan. But by then, it's usually too late to bargain away junk fees, Cunliffe said.

No. 2: Figure out the ideal type of loan for you before you compare lenders.

Are you expecting to remain in your next home indefinitely? Then chances are good that, given the current moderate interest rate environment, you'll be better off with an old-fashioned 30-year, fixed-rate loan.

But if you're a short-timer who expects another corporate transfer at some point, you may want a cheaper "hybrid loan" that keeps a lower rate locked in for three to five years and then is transformed into an adjustable rate mortgage.

No. 3: Discover your mortgage broker's true identity.

Once upon a time, nearly every home buyer went straight to a lender's office to get a mortgage, and that loan stayed in the lender's portfolio until it was paid off.

But the home loan industry has changed dramatically, and the latest twist involves the increasing role of mortgage brokers in the process.

Brokers are essentially middlemen who represent several lenders, just as independent insurance agents represent more than one carrier. Mortgage brokers work on commission for the firms that fund their loans.

The best brokers can be extremely helpful in getting excellent terms on a mortgage, says Paul Havemann, a vice president at HSH Associates, which tracks mortgage markets across the country. Still, a minority of brokers will steer you to the company or product that pays them the highest commission, Havemann cautioned.

A red flag should go up in your mind if your broker is pushing a particular loan product over your strenuous objections, Havemann said.

Suppose, for instance, that you plan to stay in the home just three to five years and the broker is trying to talk you into a 30-year fixed-rate mortgage priced significantly higher than a "hybrid" loan. In such an instance, it could be that the broker would earn a bigger commission on the fixed-rate mortgage, Havemann said.

More basic still is the question of which lenders your broker is representing. Some brokers are specialists, perhaps representing those with bad credit. If your credit is good, this could be the wrong broker for you. The way to discern a broker's true identity is to ask this direct question: For which lenders do you work?

No. 4: Don't count on the Internet to get you a great mortgage deal yet.

Although thousands of lenders have Web sites that feature their loan programs and rates, many of the rates are already outdated by the time you browse, said David Lereah, chief economist for the Mortgage Bankers Assn. of America.

"We're trying to get to 'real time' pricing on the Internet, but it's not quite there yet," he said.

Distributed by Universal Press Syndicate.

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