Buying a home is exciting and you should enjoy every minute of that excitement. You are about to make the largest, most important purchase in your life, so with that excitement, comes a layer of confusion; such as the financing part of the process.
Everyone has advice and their way is the right way or their way was wrong and they learned a lesson they want to share with you. This is all good and well meaning, but it can be overwhelming none-the-less and what’s right for others for financing may not be right for you. Here we want to offer you a guideline on what to look for in a mortgage company and the various options of financing.
Just as you have done with the house itself, or any other large purchases such as a buying a car, you want to shop around. First, take the time to get familiar with mortgage terminology so you know what these lenders are talking about. Remember, not all mortgage companies are the same and all the options they offer are not the same either. Check with several mortgage companies and get information on the following:
- Loan Amount
- Interest Rate
- Monthly Payment
- Term
These are the 4 parts to every mortgage. With this information you can compare any mortgage. It is also required that every lender provides an Annual Percentage Rate (APR). APR is not actually an interest rate; rather, it takes any fees associated with the loan and puts it in terms of an interest rate so you can compare fees and terms.
Any mortgage lender should be able and willing to provide you a list of these items for any loan option you are considering. For most major mortgage lenders, such as your bank, you can even find this information on their website, but it’s not specific to your situation. When looking at interest rates, APR, mortgage programs and terms on a website, the qualifications for this are also listed but not necessarily your criteria. It is best to consult with a mortgage specialist so he can provide you exact numbers and loan programs you qualify for.
You can also go through a mortgage broker who will ask some questions about your situation, the type of loan you’re looking for, the property you’re buying, etc. He will then go out and collect all this information and provide it to you as a good faith estimate (GFE) where you can compare apples to apples. Mortgage brokers have more loan programs available for you and can shop on your behalf to provide the best programs and pricing based on your situation.
As you are comparing mortgage options, make sure they are apples to apples in way of terms. A 15 year mortgage is not going to be the same in monthly payments any more than a 5% interest rate and a 8% interest rate are going to be the same. Interest Rate of course is a huge factor, but there are other factors you need to ask about in regards to the mortgage. Term or length of mortgage is actually the most important factor if you can find a payment that is comfortable. The longer your term (length of mortgage) the more you will pay in interest and far outweigh the rate on the mortgage.
- Adjustable Interest Rate or Fixed Interest Rate
- Length of Mortgage Note
- Origination points (fees)
- Private Mortgage Insurance (PMI)
As you shop around, lenders should offer the APR (Annual Percentage Rate) for every loan offer you consider. This includes any and all expenses and fees for the loan and is the best shopping tool when comparing mortgage lenders.
The fees are the next criteria to compare mortgage lenders against each other. The best loan offers are the ones that don’t have prepayment penalties. And try to steer clear of required PMI (Private Mortgage Insurance) as this can increase your monthly payment by hundreds. If you have a down payment of 20% or greater, PMI is never required. Escrow payments may be included in your total monthly mortgage payment and called PITI (Principal Interest Tax and Insurance). Lenders have no control on your homeowner’s insurance and tax amount, but they do have control on your principal and interest payments so this is where you can negotiate. It is best to know the what terms you have to negotiate and what terms lenders have no control of. The best lenders will provide you options and educate you to make the best decision for your specific needs and situation.