Finding the Right Mortgage

Finding the Right Mortgage Can Save You Thousands of Dollars

When shopping for a mortgage, what do you have to consider? After all, this is probably the biggest financial decision you'll have to make.

Your Housing Budget

First is how much can you afford. While different lenders will have different criteria, a general rule of thumb is that your mortgage payments be less than 30% of your total monthly income.

If you have little or no other debt, the lender might be willing to go over that amount. But remember that most lenders will also look at your available lines of credit, even if unused, and factor those when deciding how much they will lend you.

They will assume that you will eventually use all or part of that available credit and calculate your ability to repay the mortgage with that in mind.

If you have outstanding debt, the lender will consider how your new mortgage will fit into your entire budget in making their decision.

The lender will also consider the amount of the down payment you have in hand and what other assets you have. The bigger the down payment, the better. If you don’t have 20%, you probably will have to purchase Private Mortgage Insurance. Read PMI to learn more about mortgage insurance.

The type of loan you apply for can affect its affordability. For example a one year ARM usually has the lowest initial interest rate at any given time. Thus, for the first year at least, you may qualify for a bigger mortgage than if you were shopping for a 30 year fixed mortgage. But you have to be careful to take into account future interest rate increases.

Another way you can save is by applying for an interest only loan. You pay no interest for the first ten years or so of the mortgage, lowering payments, sometimes dramatically.

On the other end of the spectrum is 100% financing, which generally involves multiple mortgages. This type financing is used to get around a PMI requirement, although it can also be used by someone who doesn’t want to sell or encumber his assets.

But your payments will be higher since you are dealing with multiple mortgages.

Once you decide on what kind of loan you want, you can start shopping. But don’t try to compare a 30 year fixed to a seven year ARM to an interest only loan. Pick one type and compare apples to apples.

Also you should do your research in such a way that any offers you receive come in on the same day. Rates can fluctuate daily, so an offer received on Monday isn’t truly comparable with one received on Friday.

Other Mortgage Considerations

Besides the interest rate, consider:

• Are points charged? How many?
• Will PMI be required? How much will it cost?
• Are there loan origination fees or application fees? How much? Are they refundable if you don’t get the mortgage?
• Are there fees due to the mortgage broker? How much? If you use a broker, his fees are probably hidden in the points. But you have the right to know how much is going to the broker.
• Are there any other loan fees? Banks seem to create a myriad of them which go by various names.
• Do you have to pay the bank’s lawyers for reviewing the paperwork? How much?
• Will you have someone representing you? I recommend a real estate lawyer, but realize that is not the practice in all parts of the county, where closing agents or even title insurers handle the closing.
• How long is the rate locked in? What can change the rate? Can the rate be arbitrarily changed just before closing? This is considered a predatory lending practice, but doesn’t seem to stop the problem. Get the offer in writing if at all possible and make sure the lender sends you all the documents required by RESPA, the federal Real Estate Settlement Procedures Act.

Where to Shop for a Mortgage

A good place to start is with local banks. Check out your local papers and see which are offering good deals.

You can use a broker recommended by your realtor, but understand that there is a potential conflict of interest. The realtor and broker will probably be splitting the points and so might steer you into a loan that is better for them than for you.

In some states there might be laws preventing realtors from making any money on the mortgage. You’ll have to ask local lawyers or realtors about that.

Another potential conflict of interest has to do with credit scores. Some banks might consider a given score prime or close to it, while another bank will not and will shunt you to their sub-prime affiliate to increase their profits.

You can also shop online. With many sites you’ll get four offers after filling out on free, no-obligation form. You might get a good deal from a bank on the other side of the country you’ve never heard of.

One thing online shopping will do is let you know if the local offers you’re getting are good or not.

One source to consider is GuideToLenders.

Read the best mortgage deals to track down more online lenders.

Lenders are required to provide you with a list of all the terms and conditions, as well as a list of closing costs once they make a commitment. Make sure you get it.

At closing you will get a RESPA statement, which itemizes each dollar going to or coming from the buyer and seller. Make sure the numbers agree with the loan commitment.

The Mortgage Application Process

Applying for a mortgage generally requires more paper work than for other types of loans.

In addition to the application, you will probably have to produce your last year or two’s income tax returns, proof of employment and salary and you will be asked to sign forms allowing other creditors, as well as your custodians of assets, usually brokerage houses and mutual funds, to release information to the lender.

The bank might also ask the source of the down payment if you don’t have visible savings and make you reveal if the money is being borrowed and from whom.

Conclusion

Don’t feel pressured. Once you’ve found your new dream home, you have to act promptly, but you should have at least a month to forty-five days to get a mortgage commitment.

Shop carefully. You can save thousands by making the right choices at this point. And remember there are tons of lenders looking for your business. If you don’t like the first offer, they’ll be another waiting right around the corner.

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