Whether refinancing or purchasing a new home, shopping for a mortgage probably isn't something you do every day. And if you haven't done it since the start of the housing market crash and credit crisis, you'll see that the rules have changed. Get up to speed with this guide to shopping for a mortgage loan in today's unique market.
Mortgage Shopping: Ten Steps to Success
For best results, shop with a plan. Do enough upfront research to have an idea of what you want, then see who can get it for you. For example, if you determine that a Federal Housing Administration ( FHA) mortgage is what you need, don't waste your time with lenders who aren't approved to underwrite FHA loans.
Take the following ten steps when shopping for a home loan:
1. Determine the Purpose of Your Mortgage
This should be easy. You are either buying a new property or refinancing one that you already own. Your property type and use influences your interest rate -- the best mortgage rates go to those purchasing a single-family home to use as their primary residence. You may have to put more money down or pay a higher interest rate for an investment property, condominium, or multi-family home.
If refinancing, decide what your objective is. Most people wish to get a lower interest rate to reduce their monthly payment, but you may want to pay off your home faster, swap mortgage products, or stretch out your balance over a longer period to lower your monthly payments. Knowing why you're seeking a loan is the key to determining what kind of mortgage is best for you.
2. Decide How Long You Will Keep the Loan
This is important because it can change the kind of mortgage you choose. For example, someone who is risk-averse might think that he or she has to choose a fixed-rate home loan for maximum safety when refinancing. But in fact, if the property will only be kept for a few years, this homeowner can be perfectly safe with a 5/1 hybrid mortgage -- and pay about 1% less in interest. On a $400,000 mortgage, that difference in the interest rate is over $250 a month!
If the home you're buying is not your forever dream property, finance accordingly. Average first-time buyers keep their homes about three years, and second timers average five years. According to the National Association of Realtors, homeowners of all types keep their properties between six and seven years, on average. The length of time you plan to own your home not only influences the type of loan you select, but should also affect how much you pay for it. It makes little sense to spend thousands of dollars buying your mortgage rate down for a 30-year term and then keep your mortgage for only four years.
3. Know Your Tolerance for Risk
If nothing but a 30-year, fixed-rate mortgage will do, stick to your guns and get one. However, if risk is still your main concern, it's important to know that there are other risks that may not be as apparent -- such as the risk of paying more in interest than you need to.
4. Know Your Limitations and Challenges
Do you have credit problems? Is your down payment limited? Has your home equity evaporated? Or, are you a perfect applicant with lots of home equity, pristine credit, a 10-year job history, and no credit card debt? These factors make a difference. These days, if you don't have a lot of cash to put down, your credit has a few dings, or your income is a little less than ideal, you should probably look into an FHA loan, and narrow down your search to FHA-approved mortgage lenders.
If you are perfect borrower, then you can call the shots, shop aggressively, and go for a reputable mortgage lender with a bargain rate.
5. Select a Product
All the previous information should have helped you narrow down your options to a suitable loan product:
- government or conventional loan
- 15, 30, or 40-year term
- adjustable-rate, fixed-rate, or hybrid loan (with rates fixed anywhere from 1 to 10 years, and adjustable thereafter)
- interest-only or fully amortized (interest-only borrowers pay only the loan's interest for the first few years of the term)
Choose a loan that best helps you achieve your objectives within whatever limitations you face.
6. Compare Rate Quotes from Lenders
You can shop in person, by phone, or online with mortgage lenders. What you don't want to do is just mindlessly go with whatever lender your real estate agent recommends -- even if you like that person -- you still owe it to yourself to compare interest rates and negotiate your best deal. Completing an online form and requesting quotes from mortgage lenders is an easy and painless way to get a lot of information in a short time.
Make sure when you request a rate quote that you provide all lenders with the same information: the quality of your credit, the location, type, and use of your property, and the size of your down payment or the amount of home equity you have. Keep in mind that mortgage rates change often, so quotes obtained today can't be reliably compared against quotes given tomorrow. Choose a couple of competitive bids and then get to know the loan agents. You could compare rate quotes from upto four lenders in our network. Start here.
7. Interview the Lenders
Contact the mortgage lenders and notice who gets back to you right away. Pay attention to who asks you questions about your situation, and who answers your questions in an understandable and meaningful way. See who you feel most comfortable with when discussing your financial concerns. You already know their mortgage rates are competitive -- at this point, trust your gut and go with the person you feel best about.
8. Get your Mortgage Loan Disclosures
Ask your mortgage lender for disclosures pertaining to your loan. You should receive:
- a Good Faith Estimate (GFE)
- a Truth-in-Lending (TIL) disclosure.
The GFE details the fees associated with your chosen product and interest rate. The TIL disclosure will depict your mortgage interest rate as an annual percentage, or APR. The APR allows you to compare various loan products and make meaningful decisions. For example, what's better, a loan with a 5% interest rate that costs 1.5 points, or a loan at 5.25% that costs no points? The APR can help you decide. In this case, the 5% loan has an APR of 5.13%, while the 5.25% loan has an APR of 5.25%, so the loan costing 1.5 points is the better deal over the loan term. Each point is equal to a fee of 1% of the loan amount.
However, finding the lowest APR is not the only consideration. APR calculations operate under the assumption that you will keep your mortgage the entire term of the loan -- in this case, 30 years. So, look at your GFE and see how many fees are involved. If two loans have similar APRs, but one costs a lot more than the other in fees, take the mortgage loan with lower fees.
Your disclosures should be accurate. Once you lock in an interest rate and get a final set, the fees charged at closing should differ very little from those disclosed to you. In fact, new laws taking effect will make the lender liable for variances beyond legally established tolerances.
9. Submit Your Mortgage Application
This is probably the easiest part of the whole transaction. The Uniform Residential Mortgage Application is a fairly simple form to complete, especially if your loan officer does the heavy lifting for you, as most will. By providing all the needed documentation to the lender -- pay stubs, tax returns, bank and brokerage statements, divorce decrees, real estate contracts, and others -- you help your loan agent process your application swiftly and accurately. Look it over when it's completed. You will be signing or initialing every page, and you want it to be accurate.
10. Lock Your Interest Rate
This step is where you consolidate the hard work you've done shopping, where you make your commitment to the lender and the lender makes one to you. You have several options for dealing with your interest rate.
- First, you may choose to lock in your rate as soon as you make your loan application. If rates are very attractive, locking yours in and not worrying about it any more can be a smart choice.
- Another option is to float your rate -- allowing your rate to move with market fluctuations -- until you are ready to close on your mortgage, and then lock at whatever the current rate is. The advantage is that you may pay less: shorter rate locks usually come with better interest rates than longer-term locks. The downside is that you risk market rates increasing, which would result in you paying more. In addition, if your approval depends on you securing a certain interest rate, you probably don't want to risk losing your financing entirely. Interest rates can move very suddenly, and it is well-known that rates move up much faster than they move down.
- Finally, for those who can't stand to be wrong, ever, there are options called float-downs. You pay for them, of course, but a float-down option allows you to secure an interest rate today with the benefit receiving a lower interest rate in the future if the market rate moves lower when you close on your loan.
Your home financing decision is one of the more important choices you'll make, and should be undertaken systematically and carefully. Selecting the right mortgage product can save you tens of thousands of dollars in the long run. These ten steps can help you achieve a successful mortgage-shopping experience.
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