When you decide to purchase a home, one of the first tasks is to talk to a couple of lenders and choose which lender and loan are best for you. With all the loan variables, this is often easier said than done and it’s often quite difficult to compare one lender to another. If you’ve decided to work with a Realtor you’re in luck as he or she will be a tremendous asset in determining which loan offers the best terms and represents the best option. Never the less, it won’t hurt to have an understanding of the process and thus in this post, we’ll discuss each of the various loan variables and what you’ll want to consider.
1. Down Payment: In general, the amount you are able to put down will affect the interest rate you are offered. However, there is a point at which it does not matter how much more of a down payment you provide, and that point is usually either 20% or 30%, depending on the loan program. If you are looking for the best rate possible and have the ability to put down more, ask your lender if this would be advantageous.
2. Loan Life: The longer the term of the loan, the more you’ll pay in total interest. In part, this is because you will have a better interest rate with the 15 year loan; for instance, today’s rate from a large bank is 4.21% for a 15 year mortgage and 4.83% for a 30 year mortgage. The other reason you pay less interest over the life of the loan with a 15 year term is because you pay down your principle faster. An alternative for those seeking to pay less interest on their loan is to simply pay more into your mortgage each month and thus pay the loan down quicker. For example, on a 30-year $240,000 loan at 3.75%, if you pay $634 more per month (above and beyond your actual bill), you can end up paying the loan off in 15 years instead of 30. For many this is a better alternative as they can pay down their loan sooner however, they are not tied into and required to make the higher payment. Click here for information on additional of the types of loans including FHA, ARMs, Balloons, and more.
3. Property Taxes: It’s recommended that consumers find out how much the monthly payment will be and whether it includes Principal, Interest, Taxes and Insurance (PITI). A monthly mortgage payment most likely includes amounts that go toward all four of these. Payments of principal and interest go directly toward repaying the loan and accrued interest. The taxes and insurance typically go into an escrow account so a lender can pay these fees when they are due. If taxes and interest are not collected, put into an escrow account, and paid by the lender, then the borrower is responsible for paying these amounts.
That said, when comparing lenders, this number should be included and should not vary because your property taxes are paid to the city, county, and state, not the lender. So, this number should be constant across all lenders. But, when you look at estimated payments from different lenders, the estimated taxes will vary because it is their best guesses at what the tax bill will be at the end of the year. The easiest way to compare the lenders is to just compare the principal plus interest and add in the same number for taxes. Essentially, you are standardizing the estimated payments between the lenders so that you can compare the actual rates. Another way of doing this comparison is to ignore the estimated payments and rather concentrate on the actual interest rate they are quoting you.
4. Insurance Rate: Like property taxes, insurance is an estimate that the lenders will make. They may estimate differently, so be sure to normalize this number across all the estimated payments.
5. Interest Rate: The interest rate is variable depending on your; credit score, income, and loan type. The higher the credit score, the better the rate. Lenders have cut-offs for what they consider to be above average, average, and low scores. Those who fall into the above-average group will get the best rates. Your income comes into play when they figure your debt-to-income ratio. This is basically a way to measure how much you are bringing in and how much you are spending. At some point, a lender will not allow you to create more debt for yourself than they think you can handle. That said, you know more about your spending habits and lifestyle than the lender does and thus you should consider what you want to handle and fell comfortable with. The loan type also has a heavy emphasis on your rate. Consumers need to know whether the loan being offered is a fixed-rate loan or an adjustable-rate loan. There are important differences. The interest on a fixed-rate loan does not change and the monthly payment stays the same for the life of the loan. With an adjustable-rate mortgage, the interest rate changes, or adjusts, from time to time. Some change each month, while others change less frequently. It’s important to understand what the interest rate is, how often it may change, and the interest rate cap on the loan. If the interest rate goes up, the monthly payment will generally go up, too.
6. Points: Mortgage Points are paid by the borrower in order to buy down the interest rate. If you get some insanely low interest rate from one lender that seems completely out of whack from the other quotes, this might be because they are quoting you a rate with points. A point is equal to 1% of the loan amount, and you pay this point as part of your closing costs. So for example, with a loan for $240,000, one point would be $2,400 and that point might buy your interest rate of 3.75% down to 3.5%. Buying down your rate will lower your monthly payment but an analysis, considering ones intended length of ownership should be performed to determine if the payment of points makes sense in your situation.
When comparing lenders, make sure they all quote you a rate with no points. This levels the playing field so that you can determine who has the best rate without the hassle of having to do all kinds of calculations.
7. Closing Costs: In addition to points, the borrower pays 2-3% in loan-related closing costs. Buyers will sometimes negotiate for the seller to pay the closing costs, or if the seller is not willing to do so and the buyer cannot, or is not willing to cover this expense out of pocket, the closing costs can be factored into the loan. The majority of closing costs are lender fees. The closing costs include: the application fee, pulling of credit report fee, loan origination fees, appraisal fee, lawyer fees, application fee, and document preparation fees.
These are the main components of the loan to sort through and compare. The toughest part is to compare lenders and weigh out all the closing costs and points paid along with the interest rates. How do you compare one lender with a 3.75% interest rate with $5,000 in closing costs to another lender who has a 3.65% rate with $8,000 in closing costs? The rate is better but the closing costs are $3,000 higher, so which loan represents the best option? To compare this, the lender is required to provide you with the loan’s Annual Percentage Rate (APR), which is the interest rate calculated with closing costs wrapped into it. As long as you are comparing two loans with the same lives and are putting the same amount down, the APR is the method for determining which lender is offering the better overall package.
An additional and final point to consider, does the loan have a prepayment penalty. If it does, early loan pay-off will mean the borrower must pay the penalty amount. Loans with prepayment penalties usually have lower interest rates than an identical loan without a penalty. Those who plan to stay in their home for a short-period of time should understand any prepayment penalties that may be associated with their loan. If borrowers need to pay off (or refinance) the loan before the penalty period expires, they will be responsible for paying the entire penalty.
Shop around. Keep looking until you find a loan provider whose rates and approach you like. This can be done face to face, or over the phone or internet, which ever you prefer.
If you’re refinancing, ask your current lender about a “streamline” refinance. Your current lender may not require a credit check, a full appraisal and other services that charge fees. One caveat: Streamlines sometimes carry higher interest rates than you’d get if you start again. Do the math.
Keep asking questions until you feel comfortable, and don’t sign anything until you feel confident.
Ads for no-cost mortgages are too good to be true: If you see an advertisement that says “no closing costs,” what it means is they’ll finance the closing costs for you. They just mean there’s nothing out of pocket at closing.
Search for savings. Mortgage lenders and brokers are required by law to give you a Loan Estimate (LE) within three days after you apply for a loan. Many will give it to you earlier. The LE, which lists estimated fees you’ll pay at settlement, is divided into sections. Look in Section C page two for fees that may be negotiable.
There’s some wiggle room for negotiating this section. You may be able to whittle hundreds of dollars off your costs by informing your lender upfront that you’ll secure title insurance on your own. You are not legally bound to use the lender’s company, but you should make your intentions clear so they don’t start a title search.
Haggle lightly. While you can quibble about every line item, experts say things will probably go more smoothly if you make it clear that you’re a comparison shopper who is crunching all the numbers.
You want to say the same thing to each lender, you want to say, “Give me your best numbers. I’m giving you one chance to give me your best-faith estimate.”
If you, or someone you know is considering Buying or Selling a Home in Columbus, Ohio please give us a call and we’d be happy to assist you!
The Opland Group Specializes in Real Estate Sales, Luxury Home Sales, Short Sales in; Bexley 43209 Columbus 43201 43206 43214 43215 Delaware 43015 Downtown Dublin 43016 43017 Gahanna 43219 43230 Grandview Heights 43212 Galena 43021 Hilliard 43026 Lewis Center 43035 New Albany 43054 Pickeringto, 43147 Polaris Powell 43065 Upper Arlington 43220 43221 Westerville 43081 43082 Worthington 43235