Washington -- If you plan to shop for a mortgage in the next few weeks, keep two rules in mind that are especially pertinent to the highly competitive 1995 market:
* The lowest-rate quote you hear probably isn't your lowest-cost alternative.
* Federally mandated APRs -- annual percentage rate truth-in-lending quotes that calculate the effect of upfront lender fees -- don't necessarily tell you what you think they do.
Here's why both rules are of extra importance at the moment: Rates have edged down gradually in recent weeks and have cracked the 9 percent barrier for 30-year fixed-rate money in many parts of the country for the first time in months.
You can probably find 8 1/2 percent or even lower fixed-rate quotes and deeply discounted teaser-rate adjustables below 6 percent. Low quotes like these typically come with higher
"points" attached as part of the deal. Each point is equal to 1 percent of the mortgage amount, payable at or before closing.
But do you want a low-rate, high-point package in an environment like this spring's, or a low or no-point, higher-rate alternative? Look at this real-life scenario that you could confront as a shopper for a $150,000 30-year fixed-rate loan. Lender A quotes 9 percent with zero points. Lender B has the lowest rate anywhere in the market -- 8 1/2 percent -- and charges 3 points. Lender A's advertised APR is 9 percent. Lender B's APR is clearly better -- 8.83 percent.
Isn't the smart shopper's choice obvious? Not at all. The principal and interest payment on the 9 percent loan comes to $1,206.93 a month. Payments on the 8 1/2 percent mortgage are $1,153.37 -- an attractive $53.56 a month lower. Now figure in the true cost of the $4,500 in points. Putting aside any other features of the two loans, it will take you 84 months -- a full seven years -- to recoup the upfront costs of the 8 1/2 percent mortgage ($4,500 divided by $53.56).
Put another way, if you had to sell or refinance any time in the next seven years -- up until 2002 -- you'd be smarter to go with the higher rate, higher APR zero-point alternative.
What about taxes? After all, you can deduct the $4,500 in points against your federal and state tax liabilities, thereby lowering the effective cost. True. Say you're in a combined federal and state bracket of 36 percent. You get to deduct $1,620 ($4,500 x .36) of your points on your tax returns in the year of the loan.
The net cost of the points then becomes $2,880, which you can't fully recoup for the first 53 months -- almost 4 1/2 years down the road.
Here's still another scenario to contemplate.
Say that two or three years from now -- perhaps as the result of the mild recession some economists foresee on the horizon -- long-term rates have moderated. Instead of a 9 percent zero-point market you can get an 8 percent zero-point loan. Having laid out $4,500 in cash to get your 8 1/2 percent rate, you're unlikely to want to refinance into a new loan so early.
Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.