Q: I am a first-time home buyer and am uncertain about the steps to take.

We are purchasing a new construction and the builder is pushing us to go with their lender in order to receive a promotion of $4,000. Their lender, however, is giving us a rate of 5 percent for a 7-year adjustable rate mortgage and is also requiring us to pay part of the closing costs up front.

Is this normal?

A: Let’s start at the top: New home builders will often partner with a lender so they can guarantee you a fairly competitive, long-term deal on mortgage rates. Most conventional lenders will require you to pay a quarter or half point in order to lock in the interest rate over a long period of time.

Is this a good deal? You won’t know if this is a good deal until you’ve shopped around. So, go to Bankrate.com and see what other lenders in your area are offering for their 7/1 ARMs. I think you’ll find that 5 percent with zero discount or origination points (which isn’t quite the same thing as zero fees, but is close) isn’t a bad rate right now.

Getting $4,000 off the price of your home isn’t too bad either, and you have to factor that into the equation.

As for closing costs, what are they? Many lenders require that you pay closing costs at closing, but it’s the “upfront” that concerns me. What does the lender mean by paying part of the closing costs “upfront?” Is the lender asking for an application fee? That might be normal. But I wouldn’t pay the lender thousands of dollars upfront. In fact, you shouldn’t pay the lender anything other than a small application fee until the closing.

Overall, it sounds to me like you’re not really sure what is going on. The only answer I can tell you (since I’m not there looking over your shoulder at your paperwork) is to do your homework and research what the best lenders in your area are offering. Then, you can go to the builder’s lender and negotiate the best deal possible.

And that deal may not be good enough, even with the $4,000 bonus your builder is offering if you use his lender. So sharpen your pencil, pull out a piece of paper and a calculator and figure out how you’re going to save the most money.

Only then will you know if you’re getting a good deal — or not.

Published: Apr 23, 2004