Mortgages Explained (Part 2 of 2)

Once you've decided on the type of loan that is best for you, how do you get the best deal? We'll provide you with some insight.

by HSM Staff

Pricing a Mortgage

In order to determine if a particular loan is a good deal for you, you need to understand the three parts that go into it: rate, points, and closing costs.

RATE
An interest rate is the price that you will pay for borrowing funds from the lender and can make a huge difference in what you will be able to afford. The lower the interest rate, the lower your monthly payment. A lower interest rate also means that you will be able to take out a larger loan. The housing market usually booms when rates are low and tends to slow when rates are high.

The length of the loan is a major factor. The longer you take to pay back the loan, the more interest you will pay over time- you're monthy payments will be lower though. Conversely,you will pay less interest over the course of a loan with a shorter length, but you will have a higher monthly payment.

Consider the following comparisons between a 30-year mortgage and a 15-year mortgage (based on a monthly payment of $1,500) to approximate the amount that you could borrow at various interest rates.

30-YEAR MORTGAGE
6%      $250,000
7%      $220,000
8%      $195,000
9%      $175,000

15-YEAR MORTGAGE
6%      $180,000
7%      $170,000
8%      $165,000
9%      $155,000

POINTS
Points are upfront charges for taking out a loan. Each point represents one percent of the amount you are borrowing, for example: one point on a $200,000 dollar loan is a $2,000 fee that you would have to pay at closing.

There are two types of points, origination points and discount points. Origination points are a commission to the lender for making the loan. Discount points buy down the interest rate. The best loan is a zero-zero mortgage, one with no origination points and no discount points. Some lenders may advertise no discount points while being silent about the origination points. Be sure to read the details of the loan you are being offered.

CLOSING COSTS
The third component of a loan are the closing costs which include numerous smaller charges. Closing fees vary from state to state and they can add up quickly. Borrowers need to ask for a list that details all the fees and who is resposible for paying them.

Some lenders now offer flat-rate closing costs or no lender closing costs. With a flat-rate, the lender tells you exactly what the closing costs will be ($800, $1,000, $1,200, etcetera). You will be given this price with your quote. Other lenders require you to pay no lender closing costs at all, requiring that you pay only pay third-party costs which include outside taxes.

If your lender does not offer either of the above options, get a copy of your HUD-1 from your loan officer the day before closing. It's your actual closing statement and outlines every closing cost in detail. Compare it to your good faith estimate and look for any mistakes. The day before closing you will still be able to correct any mistakes, but it's virtually impossible to make corrections on the day of closing. Your loan officer will not be present and the closing attorney will have no idea what you were promised.

If you shop correctly, you should end up with several competing offers. One might be a 6% mortgage with no points and $1,500 in closing costs. Another might be a 6% loan with no points and $2,000 in closing costs. You would choose the one wtih the lower closing costs- simple. The most important part in the process of pricing a mortgage is to go in with your eyes open and make sure that you get what you were promised.

Lock-ins
Whenever you get a quote for a mortgage, it comes with an expiration date. The quote may be good for 30 days, 90 days or somewhere in between. This period is known as the "lock-in". Basically, it's the amount of time you have to finalize all the terms and close the loan.

Lenders are not required to honor the quote even if it was their fault that the loan didn't close on time. To ensure that you don't get taken advantage of, take the following steps:

Get a reasonable lock-in based on how long it usually takes the lender to get the borrower to the closing table- you'll have to ask them how long it has been running. If it has been taking 45 days to get a borrower to the table, a 30 day lock-in won't do any good.
You will be required to provide the lender with lots of documents and to complete many forms. Get the documents to the lender as quickly as possible. Keep careful records and copies of everything that you have submitted. You don't want any delays because of something you didn't submit or submit fast enough.
If things get off track, don't take it sitting down. Sometimes lenders drag their feet and may not return your phone calls even when the deadline is approaching. Don't settle for this treatment, shop the loan with someone else. You should have all the papers you need in hand (remember you kept copies of all the documents that the other lender required) to make a quick closing possible. The original lender may decide to do what's needed to make the closing happen on time rather than lose the loan.

Tip
You've gotten a quote with a great rate, but things are moving so slowly that you may not make closing. The worst thing you can do is be passive. Try this approach. Go to the company's website, get the names of a couple of executives, and give them a call. Tell them your situation and concerns. Often they will make sure that the loan closes on time.

Prepayment Penalties
Watch out for prepayment penalties. Some lenders will include a prepayment penalty to prevent you from refinancing. They don't want to spend money to close a loan and have you refinance a few months down the road. So if you want to have the flexibility to refinance, make sure your loan does not include a prepayment penalty.

If you do find a prepayment penalty on your loan papers (before you close), ask to have it removed. If they agree, get it in writing. Never assume that it's being taken care of. This is important because some penalties can prevent you from selling the home for the first several years.

Finding a Lender

When buying a home, your first stop for a loan should be with someone you've dealt with in the past- your existing bank or credit union. Places that have a vested interest in you and that you have faith in are more likely to behave ethically.
Avoid shopping for loans online, over the phone, or with mortgage brokers that you have not dealt with in the past. These are great methods to use when refinancing because if something goes wrong with the loan at the last minute, you still own the home. If you are buying a home though, you may have missed out on the opportunity to purchase the home.
Apply multiple times to find the best possible deal- you won't hurt your credit. The industry recognizes that when people shop with multiple lenders, they are not going to buy nine or ten homes. So all inquiries made into your credit within a 14 day period are treated as one inquiry. The credit-scoring process also ignores all mortgage inquiries that were made within the previous thirty days.

FYI
The idea of clearly stating the closing costs was pioneered by ING Direct. They offer "complete transparency" in their mortgage quotes. Visit their website at ingdirect.com for more information.