With bouncing mortgage rates scaring borrowers to death, you should be convinced that now’s a good time to test your smarts.
How high is your mortgage IQ, anyway? What type of loan is best for your situation? What’s the shrewdest way for you to shop?
If you answer at least six of the following eight questions right, you’re ready to do battle with lenders. Four or five correct is passing, but anything less than that means you’re cannon-fodder for the bank or mortgage company. There may be more than one right answer to a question.
1. Why did 30-year fixed rates suddenly jump by a half-percent or higher at some places after diving to 6.5 percent in early October?
A) Wall Street analysts spotted Alan Greenspan furrowing his brow three times during recent testimony before Congress.
B) The U.S. dollar took a stunning drop against the Japanese yen as that government unveiled a giant plan to solve its banking crisis.
C) The Mortgage Bankers Association sent a memo to banks, telling them they were nuts to let the numbers plunge so low.
2. If you take out a $100,000, 30-year, fixed-rate mortgage at 7 percent interest, your monthly payment will be only $665, but:
A) In the first year, $583 of the payment will go toward interest and only $82 toward the principal.
B) It will be the year 2019 before as much of your money goes toward the principal as the interest.
C) The total interest you’ll pay over all 30 years will be $139,511.
3. The best way to figure whether refinancing is worth it is to:
A) Make sure the new rate is at least two percentage points less than the old rate.
B) Always refinance for a shorter term than under the old loan, because that way you’ll slash the total amount of interest you pay.
C) Figure the amount you’ll save every month with a lower monthly payment, and divide it into your total refinancing cost to know the number of months it will require for you to break even on the deal.
4. A friend advises you to refinance with a 15-year fixed-rate loan instead of a 30-year loan because this will sharply reduce the interest you’ll pay. Normally this might be good advice, except that:
A) Your fees and charges are likely to be higher with a 15-year mortgage loan.
B) Your budget might not be able to afford the higher monthly payments of a 15-year loan.
C) If you move after only a few years, you could wind up losing thousands of dollars.
5. According to mortgage lenders and brokers, the biggest mistake people make when they go to get a loan is the following:
A) They haven’t done their homework on interest rates, fees and the types of mortgages available.
B) They don’t take time to compare deals at several lending institutions.
C) They haven’t bothered to get a copy of their credit report beforehand, correct any errors and strengthen their overall credit picture before they apply for the mortgage.
6. A lender suggests you consider a “3/1” or a “5/1” mortgage instead of a standard fixed-rate or ARM loan. With such loans:
A) You start with an ARM rate that’s slightly higher than the standard ARM, but remains fixed until it changes to a fluctuating adjustable rate after three or five years.
B) The rate can fluctuate for three or five years, like an ARM, then switch to a fixed rate.
C) You’re charged the current ARM rate in the early years, and a higher fixed rate thereafter.
7. The easiest, best way to shop the cheapest loan is:
A) Ask the sharpest mortgage broker you can find to help you.
B) Contact five or six lenders that offer the best combination of rates and points, and ask each one for the total cost of upfront fees and charges, the finance charges over the first five years and closing costs, including points.
C) Simply go to an electronic calculator on the Internet and plug in all the rates and points to come up with the best deal.
8. The most accurate source to help you predict future mortgage rate direction is:
A) Alan Greenspan, of course.
B) The Dow Jones Industrial Average.
C) You’ve got to be kidding. No such source exists.
– Answers: 1. B–it surprised everybody; 2. A, B and C–all three are correct; 3. C; 4. B and C; 5. C; 6. A; 7. B; 8. C.
– Credit tip: Rebate and reward offers can change or be discontinued. You need to frequently verify the offer to be sure you use the rebate before it disappears.
———-
Robert K. Heady is the founding publisher of Bank Rate Monitor and is the co-author of the book, “The Complete Idiot’s Guide to Managing Your Money.” You can write to him in care of this newspaper or send e-mail to jrnl8888@aol.com.
