Shop around and compare lenders for a home loan or mortgage to get the best financing deal. A mortgage- whether it’s a home purchase, a refinancing, or a home equity loan- is a product, just like a car, so the price and terms may be negotiable. Compare all the costs. Shopping, comparing, and negotiating will save you thousands of dollars.
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Your Mortgage 101
Be sure to get information about mortgages from several lenders or brokers. Know how much of a down payment you can afford, and find out all the costs involved in the loan. Knowing just the amount of the monthly payment or the interest rate is not enough. Ask for information about the same loan amount, loan term, and type of loan so that you can compare the information. The following information is important to get from each lender and broker:
Rates
Ask each lender
and broker for a list of its current mortgage interest rates and whether
the rates being quoted are the lowest for that day or week.
Ask whether
the rate is fixed or adjustable. Keep in mind that when interest rates
for adjustable-rate loans go up, generally so does the monthly payment.
If the rate
quoted is for an adjustable-rate loan, ask how your rate and loan payment
will vary, including whether your loan payment will be reduced when rates
go down.
Ask about the
loan’s annual percentage rate (APR). The APR takes into account
not only the interest rate but also points, broker fees, and certain other
credit charges that you may be required to pay, expressed as a yearly
rate.
Points
Points are fees paid to the lender or broker for the loan and are often linked to the interest rate; usually the more points you pay, the lower the rate.
Check your
local newspaper for information about rates and points currently being
offered.
Ask for points
to be quoted to you as a dollar amount--rather than just as the number
of points--so that you will actually know how much you will have to pay.
Fees
A home loan often involves many fees, such as loan origination or underwriting fees, broker fees, and transaction, settlement, and closing costs. Every lender or broker should be able to give you an estimate of its fees. Many of these fees are negotiable. Some fees are paid when you apply for a loan (such as application and appraisal fees), and others are paid at closing. In some cases, you can borrow the money needed to pay these fees, but doing so will increase your loan amount and total costs. "No cost" loans are sometimes available, but they usually involve higher rates.
Ask what each
fee includes. Several items may be lumped into one fee.
Ask for an
explanation of any fee you do not understand. Some common fees associated
with a home loan closing are listed on the Mortgage Shopping Worksheet
in this brochure.
Down Payments and Private Mortgage Insurance
Some lenders require 20 percent of the home’s purchase price as a down payment. However, many lenders now offer loans that require less than 20 percent down--sometimes as little as 5 percent on conventional loans. If a 20 percent down payment is not made, lenders usually require the home buyer to purchase private mortgage insurance (PMI) to protect the lender in case the home buyer fails to pay. When government-assisted programs such as FHA (Federal Housing Administration), VA (Veterans Administration), or Rural Development Services are available, the down payment requirements may be substantially smaller.
Ask about
the lender’s requirements for a down payment, including what you
need to do to verify that funds for your down payment are available.
Ask your lender
about special programs it may offer.
If PMI is required for your loan,
Ask what the
total cost of the insurance will be.
Ask how much
your monthly payment will be when including the PMI premium.
Ask how long
you will be required to carry PMI.
Mortgages
A mortgage is what one owes on his or her home or other real property that is secured by the property itself. While homeownership and all the paperwork it involves is complicated, a simple example is suitable for demonstrating what a mortgage is. If someone is living in a $250,000 home, and he is able to put down $25,000, the mortgage is $225,000, which can be broken down into monthly payments and spread out over the course of 15, 20 or even 30 years.
Glossary
Adjustable-rate loans, also known as variable-rate loans, usually offer a lower initial interest rate than fixed-rate loans. The interest rate fluctuates over the life of the loan based on market conditions, but the loan agreement generally sets maximum and minimum rates. When interest rates rise, generally so do your loan payments; and when interest rates fall, your monthly payments may be lowered.
Annual percentage rate (APR) is the cost of credit expressed as a yearly rate. The APR includes the interest rate, points, broker fees, and certain other credit charges that the borrower is required to pay.
Conventional loans are mortgage loans other than those insured or guaranteed by a government agency such as the FHA (Federal Housing Administration), the VA (Veterans Administration), or the Rural Development Services (formerly know as Farmers Home Administration, or FmHA).
Escrow is the holding of money or documents by a neutral third party prior to closing. It can also be an account held by the lender (or servicer) into which a homeowner pays money for taxes and insurance.
Fixed-rate loans generally have repayment terms of 15, 20, or 30 years. Both the interest rate and the monthly payments (for principal and interest) stay the same during the life of the loan.
The interest rate is the cost of borrowing money expressed as a percentage rate. Interest rates can change because of market conditions.
Loan origination fees are fees charged by the lender for processing the loan and are often expressed as a percentage of the loan amount.
Lock-in refers to a written agreement guaranteeing a home buyer a specific interest rate on a home loan provided that the loan is closed within a certain period of time, such as 60 or 90 days. Often the agreement also specifies the number of points to be paid at closing.
A mortgage is a document signed by a borrower when a home loan is made that gives the lender a right to take possession of the property if the borrower fails to pay off the loan.
Overages are the difference between the lowest available price and any higher price that the home buyer agrees to pay for the loan. Loan officers and brokers are often allowed to keep some or all of this difference as extra compensation.
Points are fees paid to the lender for the loan. One point equals 1 percent of the loan amount. Points are usually paid in cash at closing. In some cases, the money needed to pay points can be borrowed, but doing so will increase the loan amount and the total costs.
Private mortgage insurance (PMI) protects the lender against a loss if a borrower defaults on the loan. It is usually required for loans in which the down payment is less than 20 percent of the sales price or, in a refinancing, when the amount financed is greater than 80 percent of the appraised value.
Thrift institution is a general term for savings banks and savings and loan associations.
Transaction, settlement, or closing costs may include application fees; title examination, abstract of title, title insurance, and property survey fees; fees for preparing deeds, mortgages, and settlement documents; attorneys’ fees; recording fees; and notary, appraisal, and credit report fees.