Getting the best mortgage deal involves shopping around which means you would be able to collect a lot of information from each of the parties you contact. How much of this information can you make use to make a comparison to decide the best deal?
Well, the people who sell mortgage loans are the marketing people who understand the ways to confuse the borrowers so that they divulge only a bit and get a deal that favors them and not you. A buyer armed with the knowledge can avoid getting duped and can clinch the best mortgage deal for himself or herself.
The most important step before you start looking for a mortgage is to collect the following information from your side:
- The amount of mortgage loan you need.
- The kind of mortgage you would prefer – fixed rate or adjustable rate mortgage
- The term of the loan – 30 years or 20 years or less. For an arm should it be a 3 year, 4 year, 5 year, 7 year or a 10 year arm? These are just examples.
- The current market value of your home.
- The equity that you have in the home
- The monthly installment that you can afford.
- An estimate of your credit score.
The correct amount of mortgage loan you need can be found out by contacting the current mortgage company you use and asking them the pay off amount needed if you pay off by a certain date. This date would be approximately the date you think you might be able to close on a new mortgage. Remember, even though you would get the exact value that you need to pay off your existing mortgage, which would be the same amount as the new mortgage you need, it should still be taken as an estimate only. This value would increase if you happen to close after the probable pay off date you used when getting your pay off amount, due to the additional daily interest.
The market value of your home is not what you think it should be. The market value of your home is governed by the prices that other similar homes in your community were sold for in the recent past. You might need to go and talk to new owners or the sellers of the homes in your communities who bought or sold in the recent past. Some websites can also provide you with an estimate of your home for free by just putting in your home address and doing a search. Other factors that affect the market value of your home are:
- Any foreclosures in your neighborhood.
- The condition of your home
- The kind of homes you have in your neighborhood
- The overall home prices in the country.
Based on the monthly income you have, you should aim for a total monthly mortgage that is not more than a third of your monthly income. The lesser it is the better it is. You can check your credit score from any of the credit monitoring companies like Experian as one example. If you have been making all your payments on time, you can safely assume that your credit score would be fairly good.
You also need to arm yourself with the knowledge of the terms used in the mortgage industry. If you do not understand what the broker is talking about, you have to ask him what the term stands for and other relevant details.
Since you would have done your homework and you know the amount of the mortgage you need, you now need to shop around and get the quotes for the same mortgage amount, for the same mortgage type and term of the loan. This will allow you to compare apples to apples. If you have information about different types of loans for example from different lenders, you would never be able to compare correctly and would only add to the confusion you might already have.
You need to specifically ask for the following from each of the lenders and brokers:
- RateThat is the first thing you are looking for as it governs your monthly installments and the total amount that you would eventually end up paying. You also need to confirm the type of the interest rate that is being quoted. If you are looking for a 30 year fixed mortgage, make sure you get that rate in particular. If you get more information, that might help you make an even more informed decision. If you collect information about adjustable rates mortgage, you might find that in your case it might or might not be a better option. If you get the information for different terms of the loan, you might be able to decide if you would prefer and can afford a shorter term mortgage. Many times, the extra monthly payment for a shorter duration might only be a few tens or a couple hundred dollars, but you can save tens of thousands of interest that you pay during the total term of the mortgage.
Besides the interest rate you should clarify the annual percentage rate or the APR that takes into account the extra points, broker fees and other credit charges that can affect your total monthly payment.
- PointsPoints are the fees paid to the lender or the broker for the loan. If no points are being charged, you can safely assume that you would get a little higher interest rate as after all the broker has to be paid and you are right, it is you who end up paying even though you might have a zero closing cost mortgage deal that involved no points at all.
- FeesA mortgage process has a host of fees associated. Some of these fees are :
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- - loan origination or underwriting fees
- broker fees
- transaction fees
- settlement fees
- closing costs
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You might be able to negotiate some of these fees as no one likes to lose a good customer. However, if the actual interest rate and other fees have not already been decided, you might be given a cut on fee but some other fee might be quoted higher!
4. Down payments
In order to have at least a 20 percent equity in the home, most lenders would need you to make a down payment if you do not have the necessary equity built in. Just so that you are not surprised at the time of closing, it is important to know if such a down payment might be required at the time of closing or earlie
5. PMI requirements
When the mortgage being sought is more than the 80 percent of current market value of the home, a vendor might ask you to get the private mortgage insurance or PMI to protect himself against any loan defaults. Make sure you ask each of the lenders if they would need a PMI or not. Having a PMI can easily add more than a hundred dollars to your monthly payments.
6. Escrow preferences
Some lenders also need you to make the escrow payments for paying off the property tax and property insurance. In a way it reduces the borrowers burden of keeping track to pay off the property taxes and insurances and one need not come up with a big amount twice a year besides the mortgage payment. Contributing a fixed amount each month to the escrow can save you a lot of trouble. However, there is a downside also to it. The lenders who collect escrow do not pay the interest on the amount in the escrow. They on the other hand do get the interest on that amount from their bank!
