What are the most important things to consider when shopping for a home loan?
Last year, at this time, shopping for financing was relatively easy. Most buyers took fixed-rate loans, so it was merely a question of finding out who offered the best interest rate with the lowest points (loan origination fees).
Recent interest rate increases have changed the home financing market significantly. More and more buyers are opting for adjustable-rate mortgages (ARMs). Some buyers are looking into hybrid loan products, which combine features of fixed- and adjustable-rate mortgages.
To add to the confusion, lenders are competing aggressively for new business.
Some lenders will pay part of your closing costs. Others charge no points at all. Some will pay your mortgage insurance for a period of time. Others will overlook blemishes on your credit report. On ARMs, lenders are variously offering low starting ("teaser") rates, low margins (the spread between the index and the consumer's interest rate) and low life-time caps (maximum upper interest rate limit), in order to stimulate business.
Your first basic decision is: Do you want a fixed-rate loan or an ARM? If you can't qualify at today's fixed rates, this decision could be made for you. If you can qualify for a fixed-rate loan, but wonder if an ARM is a better deal, consider how long you plan to own the house. If you think you'll move again in 5 or less years, you'll probably save money by taking an ARM or a "two-step" loan.
A "two-step" loan is one that has an initial interest rate that's set for a period -- usually 3,5,7 or 10 years.
The initial rate is lower than the rate you'd pay on a fully amortized 30-year fixed-rate loan. After the initial interest rate expires, in 3 to 10 years, the interest rate adjusts to a rate that's set for the remaining term of the loan.
FIRST-TIME TIP: Don't let sales come-ons be the deciding factor in selecting a home loan. Remember that you have to live with the loan for a while. So consider the merits of the loan itself, not just the up-front incentive that's offered in exchange for your business.
In addition to the cost of the loan (interest rate and points), you'll want to find out the following information from each lender you talk to:
What upfront fees are charged? When are these fees paid? Are any fees refunded if you're denied a loan? Is mortgage insurance (insurance to protect the lender in case the buyer defaults) required? What will it cost? Is an impound account required? How long will loan approval take? Does the loan have a prepayment penalty? Is the loan assumable by another qualified buyer? Will the lender issue a written commitment when your loan is approved? Will the lender require that termite work be completed by closing?
Find out if the lender will lock in (guarantee) an interest rate for you, and how much this will cost. If you do decide to lock in a rate, try to negotiate a "float down," which entitles you to a lower interest rate if rates drop between the time you lock in and closing. Some lenders will give you a rate-lock (a guaranteed rate for a period -- usually 30 days) even before you've found a house to buy.
THE CLOSING: Make sure to check references before you commit to a specific lender or mortgage broker. Good service is worth a lot. A hungry loan agent who makes big promises, but who can't deliver on time, will cause you nothing but trouble.
Dian Hymer's column is syndicated through Inman News Features. Send questions and comments care of Inman News Features, 5335 College Ave., No. 25, Oakland, Calif., 94618.