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Dr. Don Taylor, CFA, Bankrate.com advice columnistBe careful with home builder's financing

Dear Dr. Don,
We are purchasing a new Richmond home in a few months and my husband and I are trying to compare the HomeAmerican mortgage rates plus $8,000 incentive, which is higher, to other lenders. I was wondering if I could get some advice on comparing lenders and what to look for. Which fees are junk? Also, the house would be completed in about 90 days, and we are also looking to lock a rate in. Do all banks charge a fee for this? Thank you.
-- Kim Combo

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Dear Kim,
From the Richmond American Web site I learned that HomeAmerican Mortgage Corp. and Richmond American Homes are wholly owned subsidiaries of M.D.C. Holdings Inc., a New York Stock Exchange company. That's not necessarily good or bad but does explain why the builder would provide an incentive to steer financing toward this lender.

In reviewing the company's most recent 10-Q report, I learned that it also sells third-party homeowners insurance and owns an escrow and title company. In some markets, maybe yours, M.D.C. Holdings Inc. provides one-stop shopping for your convenience.

A Chicago Tribune story, "Incentives to use builder's lender come under fire," explains some of the potential problems when builders provide incentives to use a lender, as does the Bankrate feature, "Should you borrow from your builder?" Bottom line, you want to shop around for financing and not just accept the rate provided by the lender affiliated with the builder. You can shop rates on Bankrate.

The lender has to provide you with a good-faith estimate of the expected closing costs, but your actual closing costs can vary quite a bit from that estimate. Bankrate periodically does a survey of closing costs, and the article that accompanies that survey explains what's normal and customary and what could be considered "junk fees." The Department of Housing and Urban Development's electronic pamphlet, "Buying Your Home: Settlement Costs and Information," also does a nice job in explaining these costs.

It's common for a lender to provide a 30-day rate lock for free and to charge for a longer rate lock. Use Bankrate to shop rates in your market, and it will tell you the length of the initial rate lock. Locking in an interest rate on a new build can be a bit tricky because the timing of when the house closes is outside your control. In an upward trending interest rate environment, you don't want your lock to expire before you close on the house. This Bankrate feature, "Rate-lock anxiety rises with mortgage rates," explains rate locks in greater depth.

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "financing a home," "saving & investing" or "money."

Bankrate.com's corrections policy -- Posted: June 2, 2006
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