Article Summary:Advice on how to chose the right home loan in seven easy steps.
Your home loan is almost as important as the home you choose. Small changes on paper - ½% here, ½% there - can mean BIG changes to your monthly payment, and thousands of dollars over the lifetime of your loan. Today, it seems as though there are thousands of mortgage brokers & lenders in every market - and there are! Unless your brother, sister, Dad, or best friend are a mortgage broker (and sometimes even when they are) your lender might not always be the most competent, or have your best interests in mind. Here are seven easy steps to take when looking for a home loan.
1) It Pays to Shop!
There are thousands of mortgage brokers in any market, and hundreds of loan programs that each broker will usually have access to. Each loan program fills a niche - a special financial situation that you may or may not belong to. High credit score with no verifiable income, mediocre credit score with verifiable income, high credit score without rental history, etc... The list goes on and on! You need to make sure that you find a mortgage broker who knows their loan programs, and can find you the best program that matches your unique financial situation. The more brokers that you talk to, the more loan programs that you will expose yourself to - and the better chance that you'll find the perfect fit, and rate.
2) Pick out the TERMS of the loan you want BEFORE you compare rates.
There are many different terms of home loans. The first is the length of the loan - 30 Year, 40 Year, even 50 Year - and sometimes Interest Only! An Interest Only loan is a loan that you never have to pay off - you only have to make the monthly interest payments. The second is the length of the rate - you can have a guaranteed rate for 30 years, or any period from 1 to 7 years. Loans with a guaranteed rate for 1-7 years are called Adjustable Rate Mortgages (ARMs) because the rate will adjust up or down with the market after the guaranteed rate period is over. The safest loan is a 30-year fixed rate mortgage. You should also be aware of a pre-payment penalty - this is a pretty substantial penalty should you decide to refinance the loan or sell the house within a certain period of time. One to two year pre-payment penalties are common, and sometimes the loan will have a longer pre-payment penalty.
3) Shop the rate and closing costs - and make sure you're comparing apples to apples.
Now that you know the terms you want, it's time to shop the rate. The best idea is to have one mortgage broker pull a tri-merge credit report and then ask that broker for a copy of the credit report. While it's not supposed to "ding your credit" every time a mortgage broker requests it, it sometimes does. Have a copy of your credit report, a copy of your bank statements, and a copy of your tax returns with you when you visit with any mortgage broker, and know the price range you're shopping for. Answer all questions honestly and tell the broker exactly what terms you want in the loan. The mortgage broker should then provide you with a Good Faith Estimate (GFE) based on your request. If you'd like to, you can ask for two GFE's - ask for one with minimal closing costs and another with the standard closing costs. Typically, a mortgage broker can get you a slightly higher interest rate with fewer closing costs.
4) Compare your Good Faith Estimates' Total Monthly Payment.
Your good faith estimate will have an estimate of your TOTAL monthly payment. The easiest thing to do would be to compare the GFEs' Total Monthly Payment and choose the lowest. However, you have to remember that the Mortgage Brokers are each estimating what your hazard insurance, taxes, Homeowner's Association Dues will be - which they have no control over. Some Mortgage Brokers underestimate these fees in order to make their GFEs look more attractive, and then explain away the higher monthly payment because "they have no control over those fees." Another easy way would be comparing interest rate. However, sometimes loans are broken up into 80/20 loans - the 80% loan at a lower interest rate and the 20% loan at a slightly higher interest rate - but with no Mortgage Insurance. Likewise, some loans are one 100% loan with Mortgage Insurance. To compare apples to apples with regards to the Total Monthly Payment, take the line item costs that are associated with the loan and compare only those. These costs will be Principal, Interest, and Mortgage Insurance (or PMI). Whichever loan program has the lowest Principal, Interest, and Mortgage Insurance is going to be the best monthly payment for you.
5) Compare Your Good Faith Estimates' Closing Costs.
Just like the total monthly payment, your Good Faith Estimates will have estimates of the Total Closing Costs involved with purchasing the house. And, just like Total Monthly Payment, some Mortgage Brokers will underestimate these costs in order to make their GFEs look more attractive, and then explain away at closing. In order to truly compare "apples to apples" with closing costs, you need to look at the closing costs associated with the loan. Now, this can get rather confusing because Mortgage Brokers & Lenders LOVE to give different names to different fees. The bottom line is, if it's associated with the loan, then it's something that they potentially have control over. In Texas, take all the fees in the "800" lines of your GFE - they should be labeled "Items Payable in Connection With Loan" - and add them together. Compare all of the GFEs' "Items Payable in Connection With Loan" charges and pick out which program has the lowest fees.
6) Take Into Account Closing Costs AND Rate.
What happens if one loan has higher closing costs but a lower rate? Another program looks like it has much cheaper closing costs but a higher rate? It's time to take into account how long the cheaper monthly payment will take to "make up" the higher closing costs. Does one program have $100/month lower payments with $1000 higher in closing costs? It would take 10 months to "make up" the higher closing costs - I would suggest taking the lower payment. Does one program have $10/month lower payments with $1000 higher in closing costs? It would take 100 months to "make up" that difference, and it's probably not worth it to take the cheaper rate.
7) Lock Your Rate!
Rates DO fluctuate and are subject to change - until you lock your rate. You will typically want to lock your rate 30-45 days before closing. If you try to lock longer than that, the lender will typically penalize your rate. The bottom line is, after you've made this difficult decision, make sure that you lock in your choice! The decision to purchase a home be rather intimidating and can seem very complex. The decision on your mortgage can be just as intimidating, and is just as important as the home you choose. If you take a step back and look at the situation in a systematic way, you will feel confident that you have made the best decision - and you will have!
Eric Bramlett is the Broker and owner of One Source Realty in Austin Texas. He has seen considerable success in real estate, and looks forward to many more years in the business. Eric currently invests, renovates, and develops real estate in the Greater Austin Texas Market. He spends his time working with select clients, helps his new agents get started in their real estate careers, helps his experienced agents progress their careers to the next level, & when he has time...he takes his dogs to the lake. Visit Eric's Austin Texas Real Estate Guide & his Austin Condo Guide today!