Customized Loan Can Mean Savings

Think about an ice cream sundae buffet put out for guests at a pool party.

You’re offered just three types of ice cream: vanilla, chocolate and vanilla-chocolate swirl. But you have dozens of choices to top your sundae, including cherries, mixed nuts and crushed M & Ms.

Just as you can build your own sundae, you can build your own mortgage, customized to save you money and meet your needs.

“There aren’t a lot of new choices, just many variables within the choices,” said Monte Helme, a vice president for AmeriNet Financial Systems of Ontario, which gives consumers information on 40 lenders’ products through realty offices across the United States.

As most home buyers enter the mortgage selection process, they are “overwhelmed and confused,” Helme said. But give yourself the time and tools to sort through the variations and you can save a significant sum, he said.

“The best way to save money is to educate yourself,” agreed Randy Willox, an executive vice president for Countrywide Home Loans, based in Pasadena.

One key is to avoid reliance on a single source to select the right mortgage, not even your real estate agent, your mortgage broker or your best friend, cautioned Larry Byrne, first vice president of mortgage lending for Great Western Bank, with headquarters in Chatsworth. Instead, seek information from several sources.

Here are a four other guideposts for the consumer.

* No. 1: Focus first on selecting one of the three basic types of mortgage.

Remember the pool party and the three kinds of ice cream offered?

The traditional loan--a fixed-rate mortgage--is like plain vanilla.

More flavorful is the chocolate, the classic adjustable-rate mortgage. This is a more volatile loan that floats with the prevailing mortgage market.

The swirl ice cream is a combination of both chocolate and vanilla. Typically such “hybrid” loans, as they’re called, give you a stable rate for three, five or seven years and then become adjustable for the rest of the 30-year term.

Given a choice, most people will opt for the “siren song of stability” that comes with a fixed-rate mortgage, said Keith Gumbinger, vice president at HSH Associates of Butler, N.J., which publishes information on mortgage markets throughout the country, including Southern California.

Assuming that rates are moderate--as they are now--most buyers who plan to stay in a home seven years or longer are better off with a fixed-rate loan than with the other two, Gumbinger said. (Seventy-five percent of current mortgage applicants select fixed-rate loans.)

In a moderate rate environment, a classic adjustable-rate loan is the right choice only if it’s priced extremely well and the borrower is sure to move within three years, he said. (A member of the military or a corporate executive who is transferred constantly could fall into this category.)

But don’t be deceived by the low “teaser rate” usually offered on an adjustable rate in the first year. Virtually all are priced in such a way that they inevitably jump at the end of the first year. Why? Because they start out at a below-market rate.

Who should take a hybrid mortgage? Someone who expects to stay in the home for three to seven years, the type of buyer that Gumbinger calls a “tweener.” By taking such a loan, you benefit from a rate slightly below market in the initial years (though currently the discount is no more than about half a percentage point).

Also, one who takes a hybrid or adjustable loan may be able to qualify for a larger home loan than is available to a fixed-rate borrower with the same financial picture.

* No. 2: Select your toppings carefully.

Few people are aware of it, but fixed-rate and adjustable-rate mortgages are available in a variety of terms beyond the customary 15-year and 30-year mortgages. There are many possible notches along the belt, including 10-, 20- and 25-year loans, said Countrywide’s Willox.

Taking a shorter-term mortgage saves money in two ways. A fixed-rate loan that pays off in 10 or 15 years should be priced at a rate slightly below the same product with a 30-year term. Also, you can save tens of thousands of dollars in interest charges if you stay in your home for a long time and pay off the mortgage in 15 or fewer years.

Of course, the payments on a 15-year mortgage are higher than those on a 30-year note. And you can accomplish the same objective by making voluntary prepayments to principle in accord with a schedule your lender will give you.

Hybrid loans can also be customized. One feature to seek is the right to convert from a hybrid to a straight fixed-rate loan at a certain point during your term. But shop for a lender who doesn’t charge for this right, Gumbinger emphasized.

* No. 3: Be cautious when you shop for mortgages on the Internet.

As might be expected, mortgage lenders have put up hundreds of Web pages. Reputable lenders are doing serious business online, sometimes even taking applications and locking in rates that way. But others are bait-and-switch artists who quote rates that seem too good to be true and turn out to be just that, Gumbinger said.

* No. 4: Don’t get snagged with fees you didn’t anticipate.

Mortgage pricing is based on the basic interest rate and the number of points paid when the loan is made. (A point is 1% of the mortgage amount.)

But some lenders throw a wild card into their mortgage pricing. They hit the unsuspecting borrower with a series of junk fees that show up at closing on the standardized closing statement, known as the HUD I form.

When you apply for a mortgage, you’re entitled to a good-faith estimate that includes such miscellaneous charges. But the estimate is just that, and many buyers remain unaware that they could face hundreds of dollars’ worth of additional fees at the closing table, said Harvey Weiner, a Washington attorney and mortgage law expert.

Still, government regulations allow consumers to examine a copy of the completed HUD I form at least a day before closing. That way they can challenge any seemingly unwarranted charges before signing final loan documents, as Weiner advises.

“You’re in a better position if you protest the fees before the loan closes rather than after,” he said.

Distributed by Universal Press Syndicate.