Quick tips simplify mortgage shopping


March 23, 2003|By Jonathan A. Azrael

When shopping for a mortgage to purchase or refinance your home, here are some tips:

If you know you're going to sell the house within the next seven years, consider alternatives to the usual 30-year fixed rate mortgage.

Adjustable rate mortgages (ARMs) are available at lower rates than fixed-rate loans. Lowest rates apply to mortgages that adjust every year. Progressively higher rates are charged for ARMs with rates that are locked in for three years, five years or seven years.

After the lock-in period, the ARM interest rate adjusts at that time to the then-current index rate, plus a predetermined margin (i.e., 2 points above the one-year Treasury bill index). Other frequently used indexes are the cost of funds and LIBOR (London Inter Bank Offering Rate).

If you can avoid escrow impounds for taxes and insurance, do it. Lenders often make you pay one-twelfth of the annual real estate taxes and homeowners insurance premium each month into an escrow account.

These escrow payments are free loans by you to the mortgage company, since they bear no interest. They keep the money until they pay it out to cover your tax or insurance bill.

Escrow accounts are required in loans insured by the FHA, VA or private mortgage insurance. But escrow impounds are not required for conventional loans. Several states have laws prohibiting mandatory escrow accounts. Maryland, unfortunately, does not.

Question your mortgage broker or loan officer in advance as to whether the lender will require an escrow account.

If the answer is yes, shop around and find a lender who does not insist on an escrow account.

With a little discipline, you can create your own escrow, by depositing one-twelfth of the taxes and insurance each month into your own savings or investment account.

Settle your loan near the end of the month.

Lenders usually require interest to be paid in advance for the month in which settlement occurs. For example, if your loan settles on April 1, you would pay the interest for the entire month of April in advance.

Your first mortgage payment would be due June 1, since from May 1 on, interest is charged in arrears. By settling near the end of April, your up-front advance interest payment will be less. Your first mortgage payment still would be due on June 1.

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