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Educate yourself. Get several quotes. Mortgage
brokers will generally offer a better deal than a bank, but it doesn't 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 don't 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.
Don't let that stop you. It's 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 won't 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 that's 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
I’ve 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. It's 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 don't 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. Don't be shy. It's 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 didn't cost a penny!
Choose wisely
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.
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