Shopping for a Mortgage Loan
Finding a mortgage
loan that meets your needs is not easy, but it is an unavoidable
part of the process of buying a home.
By now, you may
have done some preliminary research into current mortgage rates
and gone through the process of “pre-qualifying” for a
mortgage loan before you started searching for homes for sale. If
you have not been pre qualified, do so now.
If you also
requested a credit report and resolved any problems in your credit
record, or if you assembled documentation on your nontraditional
credit history, you can now shop for a mortgage with confidence.
If not below are some links to get a free credit report online
now:
You want to choose
the loan terms that are most favorable to your situation.
If you expect to
live in the house you are buying for a long time, the interest
rate may be your primary consideration.
If your only going
to keep the house for two or three years, the closing costs and
whether or not there is a prepayment penalty (a charge for
repaying the loan early) may be more important to you.
You
should have a clear idea of what kind of financing you need or
want by the time you have a signed sales contract.
Now
you need to shop around for the
mortgage lender that offers the best terms for that type of
loan. You may be surprised at the range of interest rates quoted
and by the considerable variation in the fees charged by lenders
for originating and processing a loan application.
Sources
of mortgage loans
Mortgages are
available from a number of sources:
-
mortgage
companies
-
mortgage
brokers
-
federal
credit unions
-
financial
companies
-
banks
And if your friends or co-workers have
bought houses recently, by all means find out where they got their
mortgages.
You can also check online for mortgage
loans. Below are some of the most popular websites
featuring specific loans:
Comparing
loan terms
Comparing loan terms among mortgage lenders
can be a confusing process. Use
worksheet 8 “Mortgage terms checklist,” to make sure
you get all of the information you need to compare the various
lenders’ policies and terms.
Make several copies of this worksheet and use it as a guide
when you call loan officers to compare terms.
Mortgage terms checklist
To help you better
understand the various mortgage terms available; we will discuss
each item on the checklist in turn.
Types of mortgages available. Begin
by telling the loan officer what type of mortgage loan you are
interested in—for example, a 95 percent 30-year fixed-rate
mortgage. (If you
plan to make a down payment of 5 percent of the purchase price,
lenders call this a “95 percent loan.”)
If you’re
shopping for an ARM, you will want to ask about a one-year,
three-year, or five-year ARM (the number of years indicates how
often the interest rate is adjusted).
For some home
buyers, an important decision is whether a fixed-rate or
adjustable-rate mortgage is preferable.
Fixed-rate
mortgages may be preferable to ARMs because your monthly principal
and interest payment is fixed for the life of the loan (though
your tax and insurance payments may change over time).
However, ARMs
usually offer a lower initial interest rate, which means lower
initial monthly principal and interest payments, and the
possibility of qualifying for a larger mortgage amount.
If you’re confident that your income will increase
steadily over the years, you may have no worries about an ARM.
Interest rate. Mortgage lenders
change their rates daily to reflect adjustments in the financial
markets. In addition,
the same mortgage lender will quote different mortgage rates and
fees for each type of loan it offers.
The mortgage rate
you get will determine not only how large a mortgage you qualify
for, but also the size of your monthly payments.
In order to
accurately compare the mortgage rates quoted by different lenders,
you also need to know how many “points” and other loan fees
the mortgage lender will charge.
Points. Mortgage
lenders usually charge a loan origination fee in the form of
points. Each point is
equal to 1 percent of the loan amount.
For example, one
point on a $100,000 mortgage would be $1000.
Points are usually paid as a one-time expense at closing.
Mortgage lenders
charge points to increase the yield received on the loan.
That is why you will see a lender offering mortgage rate
and point combinations of, for example, 8 percent and two points
or 8.25 percent and 0 points.
The more points
you are willing and able to pay at closing, the lower your
mortgage rate should be.
Annual percentage rate (APR). To
compare the various combinations of mortgage rates and number of
points that lenders quote, ask for the APR of a particular
mortgage. This is the
actual mortgage rate taking into account the points and other
costs of financing.
Loan term. Most home
loans are repaid over 15 to 30 years.
With a shorter repayment term, you pay far less mortgage
interest over the term of the loan, but your monthly payments will
be higher.
First-time home
buyers typically take the longest mortgage term offered in order
to get the lowest possible monthly payments.
Private mortgage insurance (PMI).
If mortgage insurance will be required, how much will it
cost? Ask about the
upfront cost (payable at closing) and the monthly premiums.
All private
mortgage insurance companies now offer programs that require no
upfront payment at closing, though the monthly premium may be
slightly higher.
Also ask whether
it may be possible, at some point in the future, to cancel the PMI
coverage when the loan-to-value ratio (that is, the amount you owe
on your mortgage divided by the market value of your property)
drops to 80 percent or below.
There are also
other types of loan programs such as a 80/15/5 or 80/20, which
avoids PMI altogether.
Rate lock-in. When a
mortgage lender quotes you a mortgage rate, that is the rate in
effect today, but it may not be the mortgage rate available to you
when you actually close the loan.
A higher mortgage
rate may reduce the size of the mortgage for which you qualify,
it’s important for you to know whether a mortgage lender will
agree to hold the quoted mortgage rate for you.
This is called a “lock-in”.
Some of the
questions you should ask are these:
-
If the
mortgage lender will lock in a mortgage rate, when will it do
so—at the time of application or only upon approval?
-
Will the
mortgage lender lock in both the mortgage rate and points?
-
Can you get a
written lock-in agreement?
-
How long does
the lock-in remain in effect?
-
Is there a
charge for locking in a mortgage rate?
Prepayment.
Mortgage lenders may charge borrowers a prepayment penalty
if they pay the loan off early.
If you think you
may sell your house before the loan is paid off (the majority of
mortgages are repaid within seven years) or refinance your
mortgage loan should mortgage rates drop, you should look for a
loan with no prepayment penalty.
Escrow requirement. The
mortgage lender will include the cost of property taxes and
insurance in your monthly payment.
Ask the lender how
much will be escrowed each month and whether you will earn
interest on the amount held by the lender.
Processing time. How
long does it take a mortgage lender to process a loan application?
Traditionally, loan approvals take 30 to 60 days or more.
Closing costs. Many of
the closing costs are fees imposed by the mortgage lender, which
may vary considerably from one lender to the next.
Ask about the following:
- the application fee,
- origination fee,
- credit report fee,
- appraisal fee,
- fee for the survey (is one required?),
- fee for the lender’s attorney,
- title search and title insurance fees,
- and document preparation fee.
To properly
compare mortgage loans, it's important to request a formal good
faith estimate and truth in lending disclosure, before selecting a
mortgage lender.
Payment schedule. Normally,
borrowers make one payment a month or twelve payments a year.
With a biweekly payment plan, you make payments every other
week, or 26 payments a year. If you get paid twice a month, rather than once a month, you
may want to consider a payment schedule that matches your pay
period. It will save
you a large amount of interest over the life of the loan.
Adjustable-rate mortgage (ARM) checklist
If you are looking
to get into an ARM, you may want one that offers you the best
protection in the event of skyrocketing mortgage rates.
The most important
thing to find out is the maximum amount your payments might
increase. Would you
be able to make such payments?
Initial mortgage rate. Look out for
“introductory discount” or “teaser” rates, in which a
mortgage lender offers very low initial rates.
They may appear to
be a bargain, but remember that the low mortgage rates last only
until the first adjustment.
After that you
will be charged the “full rate”, at which point your payments
may become higher than your budget allows.
Adjustment interval. You
need to find out how often the mortgage rate will be
adjusted—annually? Every
three years? Every five years?
A mortgage loan
with an adjustment period of one year is called a “one-year
ARM,” and the mortgage rate and monthly payment change once
every year.
Rate caps. These limit
how much the mortgage rate on an ARM can increase or decrease.
Periodic mortgage
rate caps limit the increase or decrease per adjustment period,
whereas a lifetime mortgage rate cap limits the amount the rate
can increase over the entire life of the loan.
For example, the
mortgage lender may stipulate that the mortgage rate on an ARM can
increase up to 2 percent a year but not more than 5 percent over
the life of the loan.
A lifetime
mortgage cap provides you with the most protection, but look for
an ARM that offers both types of rate caps.
Payment Caps. A payment
cap puts a limit on how much your monthly principal and interest
payments can increase, regardless of how high the interest rate
rises.
As a result, you
may end up paying the lender less than the amount of interest you
owe each month. The
unpaid interest is added to your loan balance.
The result is that
the amount you owe on your mortgage increases rather than
decreases with each payment—a phenomenon called “negative
amortization.”
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