Purchasing a home can be overwhelming and confusing especially for first-time home buyers. Here are some tips to help the home buying consumer obtain the best mortgage.
To start, the home buyer should obtain information from several lenders. Real estate home loans are available from several types of lenders; commercial banks, mortgage companies, and credit unions. Each lender may quote you a different price so it is best to contact several lenders to make sure you get the best price. You can usually find information on what lenders are offering on both interest rates and on points in the Real Estate section of your local newspaper or on the Internet. Since this information can change daily make sure you check often.
You can also get a real estate home loan through a mortgage broker which handles the transaction but doesn’t actually lend the money directly. They find a lender for you. Since they have access to many lenders you can usually find a wider selection of loan products and terms from which to choose. However, they are not obligated to find you the best deal. Consequently, you should consider contacting more than one broker, just as you should with other lending institutions.
Whether you are dealing with a lender or broker may not always be clear. In some instances you may actually be dealing with a financial institution that operates as both. Therefore, you should always ask whether a broker is involved. This is important since a broker is usually paid a fee for their services that may be separate from and in addition to the lender’s origination or other fees. You should ask each broker how they are compensated so that you can compare fees. Don’t forget you can always negotiate with both the broker and the lenders.
Next, know who much of a down payment you can afford and all the cost involved with the loan. Monthly payment and interest rate is not enough. Make sure that you are comparing the same information when you are trying to make a decision. Ask for information on the same loan amount, loan terms, and type of loan so that you are not comparing apples to oranges.
Request from each lender or broker a list of all of their current mortgage interest rates and ask how current the rates are. You want to make sure that the rates have been updated to the most recent. Also ask if the rate you will receive is a fixed or adjustable rate. Keep in mind that when interest rates for adjustable-rate loans go up so does the monthly payment. If you do decide on an adjustable-rate loan ask how your rate and loan payment will vary, including whether the loan payment will go down if rates go down. You also want to check into the annual percentage rate (APR) since it includes interest rate, points, broker fees and certain other credit charges. This can help you decide on which lender or broker has the best deal.
Third, ask about points. Points are fees paid to the lender or broker for the loan and often are linked to the interest rate. Usually the more points you pay, the lower the interest rate. Ask for a quote on points in dollar amount rather than a number of points. This will allow you to know exactly how much you will be paying.
Fourth, you should request a Good Faith Estimate from the lender or broker. This is an estimate of the fees and costs involved with the loan. A real estate home loan often has many fees, such as underwriting fees, broker fees, loan origination fees, settlement fees and closing fees many of which are negotiable. Some are paid when you apply for the loan and some are paid at closing. On some loan types you can borrow the money to pay these fees but it will increase your loan amount and total costs. You may also find a “no cost” loan but they usually involve a higher rate.
Make sure you inquire about each fee and what it includes; sometimes more than one item may be lumped into one fee. Or, if you don’t understand what the fees are for don’t hesitate to ask.
Fifth, ask your lender or broker about your down payment requirements, and if they offer any special programs. Different programs have different down payment requirements. Your down payment will also determine whether you will be required to purchase private mortgage insurance (PMI) which protects the lender in case the home buyer fails to pay. Usually a lender will require 20% down payment to waive the PMI. Ask what the total cost of the insurance will be and how this will affect your monthly payment.
Once you have collected all the information from several different real estate lenders or brokers, negotiate the best deal you can with each one. On any given day, lenders and brokers may offer different prices for the same loan terms to different consumers, even if the consumers have the same loan qualifications. Typically the difference in price is because loan officers and brokers are often allowed to keep some or all of the difference in extra compensation. This is called an overage and they are built into the prices quoted to the consumers. They can occur in both fixed and variable-rate loans and can be in the form of points, fees, or interest rate.
Have your real estate lender or broker write down all the costs associated with the loan and then ask if they will waive or reduce any costs or agree to a lower rate or fewer points. Make sure that they don’t lower one while raising another. You can always ask them if they can give better terms than they originally offered or than those of others you have found.
After you have chosen a real estate lender or broker and are satisfied with all the terms you may want to obtain a written lock-in. Lock-ins can protect you from rate increases while your loan is being processed, however, if rates fall you could end up with a less favorable rate. If that were to happen you can try and negotiate a compromise with the lender or broker.
To recap you should remember to shop around, compare costs and terms and negotiate for the best deal. Don’t be afraid to make real estate lenders and brokers compete with each other for your business. Let them know that you have done your homework.
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