Selecting A Lender
Selecting YOUR Home Loan |
 |
Selecting a lender
While they are many people who prefer to deal only with their regular banking institution, it is suggested you SHOP around to find both a lender and a loan that are most suited to your needs. There are many different options available to consumers today. In today's competitive market, it will be financially beneficial for you to do as much homework as possible upfront. Banks are not the only source anymore for obtaining a loan to buy a home, and there are types of loans available as well.
Financial Institutions- Commonly known as traditional banks or "prime" lenders.
Credit Unions- Some do issue mortgages for their members and generally can beat the rate of the bank, or at least offer the same.
Mortgage Lenders- These lenders specialize in loans only for the purpose of purchasing or improving Las Cruces real estate.
Mortgage Loan Brokers- Sometimes these people are also referred to as third party providers. They are in the business of matching up buyers and homeowners with lenders that are likely to finance them. The buyer usually picks up the fee for this service.
Private Lenders- Usually refers to sellers who are open to "owner financing".
Finance Companies- Most will issue mortgage loans, and to stay somewhat competitive, they usually offer "no prepayment penalty" as a selling point. Their interest rate may be slightly higher than that of a traditional lender, but finance companies are generally more lenient in qualifying borrowers.
Interviewing the Lender
Although lenders have many questions, and sometimes even stringent guidelines that you must conform to, do not forget that you too have the option of "interviewing" your lenders to make sure they meet your needs as well.
Here are some of the questions that you can and should ask a prospective lender:
• Are both fixed - rate and adjustable rate mortgages offered?
• What is the current interest rate?
• Are there "points"?
• Can I lock-in the current interest rate if approved and for how long?
• Is it possible to get an extension on the lock if necessary, and what is the fee for this?
• What are the other fees you will charge me in conjunction with my loan?
FOR VARIABLE RATE LOANS YOU NEED TO KNOW:
• How often can the interest rate be adjusted on a variable rate loan?
• Is there a maximum limit on each rate change?
• How often will the monthly payment be adjusted?
• Is there a cap on payment adjustments?
• Can the term of the loan be extended?
FOR ALL LOANS YOU NEED TO KNOW
• Is there a pre-payment penalty?
• What is the "grace" period on my monthly payment?
• How late can a monthly payment be made before a late charge is assessed?
• What will happen if the payment is missed?
• If you sell your house, will the new buyer be able to assume your mortgage at the same interest rate?
• Will mortgage insurance be required?
You may choose to ask some or all of these questions (or others you may have) before applying for a loan, as a means of determining which lender can best meet your needs. Be sure you ask for a photocopy for your records any time you fill out any type of credit application. You can then attach the lender's responses to the above questions as well as any other notes you've made.
You should then decide which Lender you are most comfortable with. Whomever you choose to represent you, make sure that you have selected the Lender that you trust, and who you believe has expertise, and will provide you with the service and results that you expect and deserve.
Selecting your home loan
Shopping around for a home loan or mortgage will help you to get the best financing deal. A mortgage is a product, just like a car, so the price and terms are negotiable. You'll want to compare all the costs involved in obtaining a mortgage, and then the terms of each mortgage and the ongoing costs of each mortgage (payment etc.). Shopping, comparing, and negotiating may save you thousands of dollars. You have a variety of financing options available to you, each designed to meet different goals and financial situations.
FACTORS THAT YOU NEED TO CONSIDER
1. Fixed rate mortgages
Most people use a fixed-rate mortgage. You pay a predetermined interest rate for the duration of the mortgage. You generally have a choice of a various terms (length of time until the mortgage is paid off. You should decide on the term based on your needs. Traditional mortgage terms are generally 15 or 30 years, although many lenders now offer terms of up to 40 years. As a rule of thumb, the longer the term, the more interest you will pay over time, but the lower your payment will be each month. The shorter the term, the less interest you will pay in the long run, and faster your equity will build, but your monthly payments will be higher.
The advantage of all fixed-rate mortgages is that you always know exactly how much your mortgage payment will be, and you can plan for it.
2. Adjustable rate mortgages (ARMs)
With an Adjustable rate mortgage (ARM), the interest rate stays fixed for the initial loan term, then adjusts up or down based on a specified index rate. The rate and monthly payment change on a periodic basis depending on the terms of the loan. ARMs may start with a lower rate than a fixed interest loan.
There are several questions you should ask your lender before signing an ARM contract:
- How is the rate determined? The rate you pay on an ARM after the initial interest rate has expired is based on the selected index rate plus a fixed extra amount called a margin (profit for the lender). For example, if the index rate is 5% and your margin is 2.5%, your interest rate will be 7.5%. Find out what index your lender uses and what the margin is.
- What is the Cap Rate? Most ARMs have limits (caps) that restrict the amount that the lender can change the interest rate and thus monthly payment at the time of each interest rate adjustment and the total amount over the life of the loan.
- This leads to the next Question:
How often can monthly payments change? Depending on the program, your monthly payments will change according to terms of the contract you sign when you purchase your home.
- Is the ARM convertible? Some ARM programs allow you to convert from an adjustable rate to a fixed rate and payment.
- Are there any pre-payment penalties? Many ARM programs allow you to pre-pay your loan in whole or in part without penalty, although some notes do specify a prepayment penalty.
3. Government Backed Loans
There are several government mortgage programs including the Veteran's Administration's programs and the Department of Agriculture's programs. Most people have heard of FHA mortgages. FHA doesn't actually make loans. Instead, it insures loans so that if buyers default for some reason, the lenders will get their money. This encourages lenders to give mortgages to people who might not otherwise qualify for a loan. Talk to your Las Cruces real estate broker about the various kinds of loans, before you begin shopping for a mortgage.
4. Points
Mortgage price tags come in two parts. One cost is the interest rate; the other is points. A point is equal to one percent of the mortgage amount. With a $100,000 mortgage, one point would be worth $1,000. The thing to know about points is that this is an amount of cash that the lender gets "up front" at the origination of the loan at the time of "closing." Generally, if you pay more points, you'll have a lower interest rate, or if you pay fewer points you'll have a higher interest rate. To determine which option is best for you, you'll need to estimate how long you'll own the home. The determine whether the extra amount of your payments during that period is less than the amount of cash (points) you are giving the lender initially to get the lower interest rate.
For example: You can pay one point ($1,000) at closing or no points, but $18 more each month because of a higher interest rate. If you own for more than 4½ years, the higher up-front payment may be the better deal ($1,000 divided by $18 equals 55.55 months or 4.5 years). This discussion doesn't matter if you are not able to pay the points at the time of loan closing.
There are many different loan products available today and it is often difficult to pick the one best suited to your financial goals. By answering the following questions, you'll get a feel for what's best in your financial situation.
How long do you intend to occupy the home?
- Staying 1-3 years then get 1- or 3-year adjustable rate mortgage (ARM)
- Staying 4-6 years consider a 5- or 7-year ARM with a 5- or 7-year balloon
- If you are staying 7 years or more, you can look for a 10-year ARM or a 15-,20-, or 30-year fixed rate mortgage
Would you prefer a lower payment or more rapid accumulation of equity?
- Lower payments come with ARMs
- Rapid accumulation of equity come with short term 15 or 20 year fixed rate mortgages.
What is your financial goal:
- If you are looking for more rapid Equity buildup consider a 15- or 20-year fixed rate mortgage.
- If you are looking to minimize your payments then either a 1-, 3-, 5-, or 7-year ARM or a 30-year fixed rate mortgage would be best.
What do you feel interest rates will do in the future?
- If you believe interest rates will rise a long term (30-, 20-, or 15-year) fixed rate mortgage is best, or possibly 7- or 10-year ARM with a 7-year balloon
- If you believe interest rates will fall then a short term 1-year ARM
- If you think interest rates will stay about the same you can try 1-, 3-, 5-, or 7-year ARM
How well do you tolerate risk?
- If you are Comfortable with market changes you can take the risk of a 1-, 3-, 5-, year ARM with a 5- year balloon
- If you are adverse to risks you should take a long term fixed rate mortgage.
Types of mortgages and pros and Cons for them in graph form can be found here: http://firsthomeguide.com/types_of_mortgage_loans.asp
There is very good, detailed description of all mortgage types, glossary and description of mortgage terms, and origination fees at: http://money.howstuffworks.com/personal-finance/real-estate/mortgage.htm
