So, youíre about to get a mortgage? Take a deep breath. Prepare to spend a little bit of time doing your homework. Three or four hours of effort may end up saving you thousands of dollars now, and tens of thousands of dollars over time. Home financing can be intimidating, but itís not rocket science. A few basic considerations can make a world of difference.
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Educate yourself. Get several quotes. Mortgage brokers will generally offer a better deal than a bank, but it doesnít hurt to call a bank or two for comparison as well. A good loan originator will spend as much time with you on the phone as you need. And a truly professional loan originator will ask enough questions to understand your goals. If you donít feel good about a conversation, trust your instinct; cross them off your list and move on.
Get everything in writing
Make sure to ask for Good Faith Estimates. There can be quite a few costs associated with getting a mortgage. You want to see every one. Comparing Good Faith Estimates can be challenging because different mortgage lenders often use different terminology. Donít let that stop you. Itís also a good idea to ask the mortgage broker if there are any additional costs that are not shown on the estimate.
Ignore the APR
APR, or Annual Percentage Rate, was originally designed to help borrowers compare mortgages. I wonít go into the mathematics involved, but in principle APR was a good idea. In practice it has turned out to be useless. Lenders do not all use the same inclusion methods in calculating APR. To add to the confusion, adjustable rate mortgage calculations are notoriously misleading. But thatís okay! APR involves two variables, note rate, and closing costs, and all you need to see is on the Good Faith Estimate.
Points versus rate
Iíve been a Florida mortgage broker since 1989. My company is also licensed in Georgia, Massachusetts, and Virginia. We talk to lots of people about home financing. Itís my experience that when people are shopping for a mortgage they often fixate on the interest rate, and overlook the points. Interest rate and points are inversely related. Unless you specify that you donít want to pay points a lender is likely to price your loan with one or two points. This will make your rate lower, but it may not be a better deal. If the lower rate saves you fifty dollars a month on your payment but you pay an extra five thousand dollars in points, it will take you eight years to catch up with the cost of the points. Do the math.
The margin trap
Many adjustable rate mortgage programs now offer a variety of margins for you to choose from. This means that you may have an opportunity to control your future interest rate. Sooner or later all adjustable rate mortgages adjust to an interest rate that is equal to an index plus the value of your margin. You have no control over the movement of the index. But if you can get a lower margin you will have a lower rate (once your loan starts adjusting) for as long as you have your loan. Your good faith estimates should all indicate the margin for your loan. Call the individual mortgage brokers and tell them you are interested in a lower margin. Donít be shy. Itís your money!
Pre-payment penalties; Good and bad
As a Florida mortgage broker licensed in several states I discuss financing with many people every day. Most people are averse to considering a loan with a prepayment penalty. But it is worth looking into. Adding a prepayment penalty to your loan may reduce your interest rate significantly. Prepayment penalties typically expire after three years, but recently many lenders have started offering a choice of one, two, or three year penalties. Will you still be in the home past the expiration of the prepayment penalty? If you outlast the penalty you have reduced your monthly payment for as long as you have the loan. That can add up. And it didnít cost a penny!
There are an amazing number of mortgage programs to choose from these days. You can select a fixed or an adjustable rate mortgage. Or you might choose one of many hybrid fixed period adjustable programs designed to give the comfort of a fixed for a predetermined number of years before starting to adjust. Interest only options are available now on both fixed and adjustable rate programs. When selecting your mortgage program think about yourself. Any decision only makes sense if it makes sense in the context of your life.