Blog

3 Terms Every Mortgage Shopper Should Know

There are three terms that every mortgage shopper should know to better understand what he or she is getting into.

Shopping for a mortgage can be a very confusing experience, particularly if you are unfamiliar with the process. There is a lot of paperwork to sign, documents to read and procedures to be followed. You’d think you were applying to go to Harvard or Yale, except they don’t require that much paperwork for you to be admitted!

There are three terms that every mortgage shopper should know to better understand what he or she is getting into. Going into a mortgage knowing just a few facts will help you immensely in understanding what type of commitment you are getting into.

The first term you should understand is, amazingly, the word “term.” Term refers to the length of the mortgage you are taking out – or the amount of time you are making payments.

Many mortgages run the gauntlet of between ten and thirty years. The longer the mortgage, typically the lower your monthly payment will be (and the more interest you will pay over the life of the loan). There is a trade off here. Although it makes sense to go for the shortest term you can comfortably afford, the reason why 30 year mortgages are by far the most popular is, because of the reduced monthly payment. If a month comes along and things are tight, you won’t be expected to make the higher monthly payment. At the same time, you can always make extra payments to principal any time to reduce the remaining term of your loan.

Next, understand the interest rate on your mortgage and how it is calculated. The interest rate refers to the amount of interest charges you will pay for the money you are borrowing expressed as a decimal – such as 4.25%. Is it fixed or adjustable? In other words, will it be the same throughout the life of the loan, or does it change at specified periods in time? Most home buyers should try and steer clear of adjustable rate mortgages even though they can look better up front. They can often reset to higher interest rates and come back to bite you if you aren’t ready for a jump in your monthly payments!

Finally, understand what closing costs are and how they are going to affect your purchase price. On a purchase money mortgage, you are going to be responsible for coming up with closing costs out of your own pocket. Closing costs consists of things such as appraisals done on the house, attorney fees, title fees, recording fees, etc. Be a smart and savvy consumer, if you see a fee that you don’t understand or doesn’t seem right – speak up! With the new mortgage disclosure laws just enacted in 2015, you will have a chance to review all your closing costs well before you close your loan. I always make sure to go over all these costs with my clients.

Understanding these three terms can help make you a more informed home buyer and help you find the mortgage that is right for you.

10 Critical Questions to Help You Choose The Right Mortgage. Part III (Last part)

OK, here are the final five questions to ask your lender…

OK, here are the final five questions to ask your lender…

Can you give me an estimate of my closing fees? Every mortgage involves fees that are paid to the lender and other companies involved in the financing process. Ask for a realistic estimate of what those fees will be, based on the specific mortgage details you’re talking about. Any lender that can’t provide an estimate should be viewed with suspicion.

How much will it cost to pay out this mortgage before the term is up? Sure, you may not plan to pay out your mortgage early, but what if you need to move or refinance unexpectedly. Some mortgages with low rates have HIGH prepayment penalties which make getting out of the mortgage VERY expensive. If your plans could change, it may make sense to pay a slightly higher rate and get a more affordable prepayment penalty. Be sure to ask about the terms and conditions of any prepayment penalty. We do not charge a prepayment penalty on any fixed rate loan.

What documents will I need to provide? Every mortgage requires you to provide some documents. But the number of documents can vary. As the name suggests, “Full Doc” loans require full documentation of income, assets, debt payments, credit history, etc. “Low Doc” loans require a minimum of documentation. However, you normally have to have very good credit and a large down payment to qualify for a Low Doc loan—and they can also carry a higher interest rate. Make sure you find out all the details.

How long will it take to process this mortgage? Once your mortgage application is approved, it can take from two weeks to two months (or more!) to process and fund the loan. Because you’re going to be on a deadline (the closing date of your house), ask the lender for an accurate processing timetable. This will also help you decide whether you need to lock in your interest rate.

What are some of the things that could slow the approval process? Nobody likes surprises, especially lenders! If the information you’ve provided is complete and accurate, there should be no delays. But changes to that information can really make a difference. If during processing, your income changes, you take on a new debt, you get married or divorced, or an undisclosed credit problem comes to light, there will be delays. Make sure you know exactly what the lender needs, so you don’t accidentally leave anything out.

Use this checklist for each lending institution you contact, whether you speak over the phone or in person. It’s a good idea to do all this research on the same day since mortgage rates can fluctuate daily. Be sure to record the company name, contact name, type of mortgage quoted, interest rate, etc. along with all the answers to the questions.

And by the way, feel free to give us a try…I know all the answers!

Good luck!

10 Critical Questions to Help You Choose The Right Mortgage. Part II

The best way to protect yourself is to go through every item on this checklist with each lender BEFORE you go any farther.

Today’s mortgage market is very complex, with more choices than ever before, innovative new features being introduced every day, and unexpected conditions and fees hidden in the fine print. The best way to protect yourself is to go through every item on this checklist with each lender BEFORE you go any farther. Let’s start with the first five in this post, and then we’ll wrap things up on my next post.

 What’s the APR (annual percentage rate) on this mortgage? Be skeptical of the first rate you’re quoted. Always ask if it’s the annual percentage rate. The APR is usually higher because it includes the additional fees involved in procuring a loan. And don’t always believe the APR quoted in ads. Lenders often use bait and switch tactics: they’ll quote a low rate to get you in the door, but it may not include all the points and fees, or it may be almost impossible to qualify for.

 How much of a down payment will I need? Most mortgages require a down payment of somewhere between 5% and 20% of the loan amount. The higher your down payment, the more attractive your rate and terms will be. However, you may not be able to afford a high down payment. If you can’t manage a down payment of 20% or more, your mortgage is required to be covered by private mortgage insurance (PMI), which will involve paying an insurance premium.

 How much extra will it cost to lock in my interest rate? As you know, mortgage rates are changing all the time. If rates rise between the time you apply and your closing date, you can pay thousands of dollars extra over the life of your mortgage. Most lenders will let you lock in the rate you discuss at the time you apply so there are no surprises later. But there’s often a fee for this, so find out how much it might cost. We do not charge a fee to lock in an interest rate that is up to 60 days.

 Are you going to charge any discount points? Some lenders charge prepaid mortgage interest points that can have a big effect on the cost of your loan. Ask for full details.

 What are the guidelines I need to meet in order to qualify for this mortgage? Every mortgage has requirements that relate to your employment, income, down payment, credit history, assets and liabilities. First-time home buyer programs, VA loans and other government-sponsored mortgage programs typically offer easier qualifying guidelines than conventional loans.

OK, stay tuned for my next post, where I’ll give you the final five…

10 Critical Questions to Help You Choose The Right Mortgage. Part I

What I’d suggest is that you sit down with your spouse and consider some of the following issues. Only then will you be able to answer the questions any responsible lender will ask in order to help you choose the right mortgage, rate and features.

Before you even pick up the phone to call a lender, give some thought to your financial situation and needs, both today and in the future. No lender can provide the best mortgage for you without understanding your needs. And they’ll never understand your needs unless you can explain them clearly and specifically. Since there’s a lot of meat on these bones, I’ll start with the issues, and in my next blog post I’ll give you a great checklist that you can use with any lender before you get started.

What I’d suggest is that you sit down with your spouse and consider some of the following issues. Only then will you be able to answer the questions any responsible lender will ask in order to help you choose the right mortgage, rate and features.

• How long are you planning to live in this home?
• How are your finances likely to change over the next few years?
• Which are you more comfortable with: mortgage payments that always stay the same OR payments that rise and fall with the treasury rate?
• How soon would you like to be mortgage-free?
• When will your children be entering college or university?
• When are you thinking of retiring?

OK, now that you have your needs and goals in mind, you’re ready to start making some calls. As I said, any responsible lender will ask you a lot of questions in order to narrow down the options and select the right mortgage for you and your family. But if you want to make sure you’re getting the very best deal available—after all, that’s exactly what you deserve—you have to ask some questions too.

Stay tuned for a detailed checklist on what to ask your lender when you shop for a mortgage…