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Shopping For A Loan
Not all mortgages are the same. You should put as much time and effort into finding the right mortgage plan as you do looking for your perfect home.
Where Should You Begin?
A good place to start is by visiting the bank you keep you accounts at. See what they have to offer, but don't stop there. There are a wide range of financial institutions that offer mortgage loans. These include mutual savings banks, mortgage companies, savings and loan associations, and commercial banks. Each institution's mortgage's specifics will vary. Be aware of each institution's fees and services. Another place to search is the internet or your city's newspaper. See if you can find a mortgage credit guide for your area. Using this type of guide can save you lots of time searching for which lender offers the lowest rates because you have to talk to each lender individually. If you are already working with a realtor, they can help you find a good lender.
Choose the Right Mortgage For You
There are several types of mortgages and variables within each. Your loan choice will:
- Decide how much home you can buy,
- Affect your current and future monthly payments,
- Determine how long it will take to pay off your mortgage and how much you will ultimately pay, and
- Influence how predictable your payments will be.
Here are some central questions that you should ask when searching for a mortgage loan.
1) Fixed Rate or Adjustable?
First, choose whether you want a fixed rate or an adjustable rate loan. In the former, you lock in to a rate for the life of the loan; if lower rates become available, you have to refinance to take advantage of them, but if rates go up you are protected.
Over time, more of your payment goes to principal and less to interest. This is the most common type of loan, geared toward long-term homeowners seeking financial stability.
In an adjustable rate loan your monthly payment can go up or down as rates change. Adjustable rate mortgages (ARMs) usually offer lower initial rates than fixed-rate mortgages, but as interest rates rise and fall, your monthly payments can become unpredictable. ARMs are beneficial if you are making a short-term investment (because they will provide lower initial monthly payments), or if you anticipate your income increasing substantially in a few years. And since the monthly payments are less, you'll have an easier time qualifying for ARMs.
2) Are there federally or privately insured loans available from the lender?
Some loans are insured by such federal agencies. This can include the Department of Veterans Affairs, who provide loans to veterans, and the Federal Housing Administration. If the loan is not provided by the government, it is a conventional loan.
Federally-insured mortgages may appear more appealing to buyers than conventional mortgages, because the down payments are often lower. However they can have more limiting terms than conventional loans. For example, a government-insured loan might only be available to a buyer if they are purchasing a specific type of home, or a property that is in a certain price range.
3) 15, 20 or 30 Years?
The shorter the term of your loan, the less interest you pay in the long run - but the higher your monthly payments. You'll save enormous amounts of interest as the term decreases, so a 15-year loan is a good idea if your goal is to pay off the mortgage as quickly as possible - as long as you can handle the higher monthly payment, and if the tax deduction on interest is less important to you. If you want to buy more home now - either for enjoyment or investment, to get higher tax deductions, or to invest elsewhere - you may want the longer term.
4) What Kind of Loan?
There are several types of loans, including: Conventional, Jumbo, No Income Verification, Interest-only, FHA, and VA.
The federal government does not directly insure a conventional mortgage. Most conventional loans under $417,000 are administered through Fannie Mae or Freddie Mac - private corporations that are regulated by the government.
Loans over $417,000 are called "jumbo loans." They are funded by the private investment market, and usually have a higher rate than conventional mortgages.
FHA loans are insured but not funded by the Federal Housing Administration (FHA). They are designed for low- and middle-income borrowers and first-time Buyers. There are, however, limits - which vary from county to county - on the maximum loan amount. On January 1, 2000, HUD began insuring loans up to $121,296 in communities where housing costs are relatively low, and loans up to $219,849 in high-cost communities. FHA loans have more lenient qualifying standards and ratios than conventional loans. They are available in both 15- and 30-year fixed-rate terms, and 1- year adjustable rate mortgages.
VA loans for qualified military personnel are insured but not funded by the Veterans Administration. They are available as 15- and 30-year fixed as well as 1-year adjustable mortgages. They have lower down payment requirements - as low as nothing down at all - and lenient qualifying ratios.
While FHA and VA loans may allow you to buy more home if you qualify, they involve extra paperwork and delays in obtaining appraisals. Sellers in a hot market don't like to deal with Buyers using this type of financing.
No-Document loans are designed for self-employed Buyers who don't want to verify their income, and for Buyers with nonexistent, brief or blemished credit histories. They offer a shorter application and streamlined approval process. However, they carry higher interest rates and fewer lenders offer them.
Interest-only loans are a short-term move to keep monthly payments low. They are risky because of the need to refinance or pay off the principal at the end of the loan term.
5) Points or No Points?
"Points" are up-front costs tied to your mortgage. Each point represents 1% of your loan amount, paid to your lender at the closing in cash. If you pay additional points up front, you can get lower interest rates. It may make sense to pay the points if you have enough cash, intend to keep the house for the long haul, and are getting an interest rate low enough that you don't plan on refinancing. Your lender can tell you how many years it will take for you to break even on points.
6) Which Lender?
You'll want to compare several lenders, and / or use a mortgage broker who represents a number of lenders. Lenders will vary in rates, points, terms, and qualifying standards. Your Dream Town Realtor® can help you assess the advantages and disadvantages of the various loan proposals you'll receive.