Six Things You Should Know When Getting a Mortgage Loan
Mortgages can be complicated, but with a little explanation, even the most difficult financial concepts can be made easy.
1. Make sure you get the right loan for you.
You've found your dream house and now all you need is a loan. Hold everything, even if you've been through this drill before. Make sure you get a loan that's appropriate for your needs.
One mistake common to many borrowers is taking a one-year adjustable-rate mortgage because of the "sucker rate," an artificially low rate that hops up quickly in the second year, says North Carolina mortgage broker Christopher Cruise. If you know you are going to be in your house for more than just two or three years, you ought to consider getting a delayed adjustable or two-step mortgage, which adjusts to a fixed rate after a set period. The initial rate will be higher, but you won’t experience the shock that comes with the typical one-year ARMs.
2. You can bargain for a better rate.
"Most consumers know enough to shop around,” says Peggy Twohig, Assistant Director for Credit Practices at the Federal Trade Commission. “Lender A tells them 10.25% and Lender B says 10%. But they don't know that Lender B can go down to 9.75% because they don't bother to ask." To keep this from happening, get your loan officer to show you the daily rate card -- a printout that lists the lowest available rate on all of his products.
3. APR may not mean what you think it does.
When lenders advertise their loans, they use annual percentage rates, or APRs. The APR is supposed to help you compare loans on equal terms by combining the fees and points with a year of interest charges to give you a loan's true annual cost.
However, every lender’s APR policies are different, so it can become complicated. Some include their application fees in the APR, some don't. So two loans from different banks may have different APRs even though they have identical rates and points. To complicate things even more, APRs also vary depending on the size of the loan, whether it is adjustable or fixed, and on the lender’s requirements for mortgage and title insurance. Not many people understand the differences, says Keith T. Gumbinger, an analyst with HSH Associates, a New Jersey mortgage research and tracking service. "We have studied it and determined that [the APR] is fairly meaningless."
4. Be ruthless when examining the costs on your mortgage.
Lenders are required by Respa, the Real Estate Settlement Procedures Act, to give you a good-faith estimate of your closing costs when you hand in your application, and extra charges are a violation of the law.
Once you hand in your loan application, always ask for the detailed, itemized list of your estimated closing costs because lenders are required to provide the estimate by law. Then on closing day look carefully at the figure called "amount financed" on your settlement papers. If it does not equal the principal you are borrowing, minus any points or interest paid upfront, ask your loan officer why.
5. Understand the terms of your mortgage insurance obligations.
You need to buy mortgage insurance because you can afford only 15% of your down payment, but your lender assures you it's no big deal. Once your equity grows to 20%, he says, you can bag the insurance payments. Not necessarily.
The Homeowners Protection Act of 1998 requires lenders to automatically cancel the mortgage insurance once the homeowner's equity reaches 22%. Before that, it's the lender's prerogative. And the 22% rule only applies to standard mortgages (not high-risk) initiated after July 29, 1999 for which payments are current.
PMI can be expensive. On a mortgage on a $200,000 home, with 15% down, a buyer's mortgage insurance will cost about $43 a month, or $516 a year. With just 5% down, the cost goes up to $120 a month, which is almost three times as much, according to GE Capital Mortgage Insurance. Depending on which insurer you go with, it can cost even more. Some require an additional fee upfront -- on top of the monthly payment -- of as much as 1% of your loan if you put only 5% down. Since your lender typically chooses your insurer, this is probably going to b beyond your control as well.
Before you close on your loan, it is very important to make sure you understand the terms of your mortgage insurance obligations. Get your lender to explain what conditions you have to fulfill before you can stop paying for insurance. Some lenders simply require an appraisal to prove you've paid down 20% of the home's value.
6. Being "prequalified" doesn't mean that much.
Lenders will tell you that pre qualified borrowers practically have their mortgage in the bag. Sometimes they will preapprove you based on what you have written or verbally stated with no verification. These are called "wastebasket" approvals. When it comes to actually getting a mortgage, they don't mean anything. That final approval is dependent. Happily, lenders are adopting tougher pre-approval rules. Always get it in writing before you make your final decision.
This information is not to be used as investment advice, but for informational purposes only. Republic Bank & Trust Company prohibits the dissemination, distribution or copying of this document without the Bank's prior written consent. Please consult your financial or tax advisor for further information. Member FDIC.