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How to Shop for a Mortgage
There's more than one way to get a home loan. But to secure
the best deal, you have to explore the complex world of interest rates, points,
and fees. Here's a look at the landscape.
Check the marketplace
You can obtain a home loan from a commercial bank, savings and loan, credit
union, mortgage company, and other financial institutions. You can shop around
on your own or use a mortgage broker, whose job is to find a lender for you
among several options. The trick is to tell a lender from a broker, as the
categories can overlap: No matter where you go, ask whether a broker is
involved. Note, too, that brokers don't have to offer you the best deal unless
you've contracted with them to do so.
Start building your list of candidates by checking your
newspaper's real estate section — or look in the Yellow Pages under
"Mortgages." Ask friends and colleagues about their mortgage
experiences. To find lenders who compete to give you the best deal, go to
www.lendingtree.com.
Comparison shop
How do you know which lender offers the best mortgage? By comparing apples to
apples: As you contact lenders, ask for information on exactly the same loan
amount, term, and type of loan. Common types include fixed-rate mortgages, in
which you pay the same interest rate for the life of the loan, and
adjustable-rate mortgages, where your rate changes periodically. In 2002,
conforming mortgages for single-family homes are loans of up to $300,700 (up to
$451,050 in Alaska and Hawaii). A mortgage in excess of that amount is called a
jumbo or non-conforming loan. The interest rate is usually higher on a
non-conforming mortgage.
Among other topics, your discussions should cover:
- Interest rates. Mortgage rates can change
daily, so it's best to call all your lender candidates on the same day. Ask
for both the standard rate and the annual percentage rate (APR). The APR
takes all your mortgage costs - interest rate, points, and fees - and
expresses them as an annual interest rate.
- Points. You pay points to the lender to get a
lower rate; each point equals one percent of the mortgage amount. For
clarity's sake, ask the lender to quote you points as a dollar figure.
- Fees. You may run into fees for loan
origination (processing the loan), the application, credit reports,
appraisals, title insurance, surveys, and even the lender's attorney. Ask
each lender or broker for an estimate of all fees. Find out what each fee
includes. Several sources provide worksheets for asking the questions and
making comparisons. Write, for instance, to the Consumer Information Center,
Pueblo, CO 81009 for the brochure Looking for the Best
Mortgage—Shop, Compare, Negotiate. You'll also find information at the
CIC web page, www.pueblo.gsa.gov/housing and Fannie Mae, www.homepath.com.
Negotiate!
Here's the good news: Most of the costs we just talked about are negotiable. As
you speak with lenders and brokers, ask if they can waive some of the fees,
reduce the points, or lower the interest rate. Your bargaining chip is your
knowledge of the market: All that homework translates into more choices for you
and the best chance at getting the best deal available.
Tax implications
You can deduct points and your mortgage interest as long as your mortgage is
secured by your home and only to the extent the amount of your mortgage does not
exceed $1.1 million.
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TIP
Once you've negotiated a
mortgage agreement, consider asking for a written lock-in. This document
"locks in" the interest rate, protecting you from rate
increases that may occur up to the closing. Make sure the lock-in
includes the rate, the points, and the period that the lock-in lasts.
And find out whether you can get a lower rate if the interest rates drop
before closing.
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When choosing a mortgage, you will literally have hundreds of types of loan
products to choose from. It is important to have a good loan officer to help you
sort out things and to help work through the different programs with you. I
always suggest you consider the following: #1. How long will you live in this
property? This is important because it can help us decide what loan program and
the term of the loan that would best suit your financial needs. For example,
maybe a hybrid loan is better for you then a 40 year fixed rate loan. If you are
going to live in the house 5 years, we will weigh out a hybrid loan over a fixed
rate loan because the rate is lower and the payment is lower. This will result
in a lower cost mortgage for you let'sthan say a fixed rate loan. #2. Also, we
need to think about the down payment on the loan. Is your money better off being
used to pay down debt or to keep earning you money in investments? Maybe you do
want a much lower payment so putting down a large down payment is the thing to
do? These are the types of things we will talk about during a FREE phone consult
and when I preapprove you.
Some of the most popular loan programs are:
-FIXED rate loans- there are 40,30, 25, 20, 15 and 10 year Fixed rate
loans. You can do zero or 5% or 50% down on these products.
-HYBRID loans: These loans are fixed for 2 or 3, 5, 7 or 10 years. For
example, after 5 years, the loan then turns from a fixed rate into an adjustable
rate that will change one time per year and that is generally linked to the
one-year treasury arm so it is easy to track. Rates on these programs are lower
than standard fixed rate products, which is why these and some balloon products
are so popular (balloons are usually in 5 or 7 year terms). You can also get
these products with no mortgage insurance.
-ZERO DOWN Payment loans: Now, you can even do these loans with no
mortgage insurance! A pre-approval is absolutely necessary with a zero down
payment loan as in some cases; there may be a certain credit score required.
Sometimes, zero down payment programs will have slightly higher rates because
you are not putting down any money but your payment itself will not be much
higher. I can do the figuring for you. You can also qualify for zero down with
no income verification!
CREATIVE FINANCING
A very popular tool we seem to use a lot of lately is a no mortgage insurance
loan. If you have great credit, I will look at these for you. There are also
investment property loans, FHA and VA loans and Farmers Home loans. There are
special first time buyer programs where the government will help pay part of
your mortgage payment for you (such as the Mortgage Credit Certificate Program).
There are programs where we can get a grant from the government for the down
payment and you don't even have to pay this back! There are programs that you
can qualify for if you don't show a lot of income (as is sometimes the case with
self employed or commissioned people). There is owner financing and cash out
refinances on property to pay off debt or use for down payments on other
properties. There are bridge loans. The list goes on and on……
ADJUSTABLE RATE LOANS: There are so many types of adjustable rate
loans it is impossible to list them all. However, they usually all start at a
lower rate but the rate has the ability to go up and down over time. In a rising
interest rate environment, rates will go up an in a downward trending market,
they will of course go down!
9 Things to Avoid when Choosing a Mortgage
Company!
- Out of state lenders.
Without being intimately familiar with our state your fees will
likely be wrongly estimated.
- e-lenders who are solely or
primarily web-based.*
- A company who will not give you
their loan officer's home phone number.
- Lenders lacking a clean record with
the BBB. Click
here to check any company
- Accepting a closing cost estimate
without a maximum fee guarantee.
- A loan officer who will not give
you referrals from previous customers.
- Giving your application to a data
entry clerk over the phone.
- A company who does not offer a free
float down option.
- Lenders who underestimates prepaids
(interest per diem and tax escrows) and title insurance fees.
These fees are set by the state and it is illegal for title
companies to give any discounts other than the standard 3 discounts
they ALL will give (new developments, 7 year reissue, and 3 year
reissue). If a lender quotes a lower title premium than is on
the state chart it is a sign they are obviously
"low-balling" their closing cost estimates and are giving
you a worthless estimate. This is a litmus test for an honest
good faith estimate.
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