Finding the best home loan is not a job to be taken lightly. Here are 10 very important tips to consider before, during, and after the loan.
1. Looking For The Right Home Loan For You
Mortgages are not commodities. If you think “it’s all about the rate”, you are going to be disappointed from the start. It’s really about finding a trusted partner help you navigate a complex transaction by offering honest advice and responsive support throughout the entire loan process.
2. Online is not the place to transact your biggest liability. Buy a music player, bid on sports equipment, order some books, but don’t do a mortgage over the internet. There are too many variables that arise throughout the process. This is not to say you should exclude the internet in your rate search, as there are reputable sites on the net which will help you find rates, calculate your potential loan, and provide other helpful information. I’m suggesting you shouldn’t work with an internet-only firm for your mortgage.
3. There are two types of mortgage lenders who advertise on the web and on the newspaper rate table: Ones you’ve heard of and ones you haven’t. Why do the major, well-known lenders generally quote higher rates? It could be they have higher cost structures. It could also be they are more reputable and provide a lot more service.
4. Generally, avoid interest-only loans. Unless you plan to move in a short period of time, or the loan is a short-term “bridge” or construction loan, avoid the “interest-only” loan. If you are only paying interest, you do not build up any ownership or equity in your home.
5. Are the fees reasonable?. Find out exactly what the loan will cost you. While some fees might not be avoidable, know that many fees are unnecessary “junk fees” or negotiable. Be sure to get a good faith estimate statement which shows your total expected fees. Some companies will include all the fees in the interest rate they quote you. Here are some fees to ask about:
Points (if you pay points, make sure your interest rate is reduced. A rule-of-thumb is to generally avoid paying any points if you plan to live in your home less than ten years)
Loan Processing (these fees can be pretty arbitrary)
Appraisal Fee (cost to estimate the value of your home)
Title Insurance (you have to pay to protect the lender. Always make sure the Title Insurance specifically protects you as well. It’s normal to pay more to protect your interests)
Documentation (these fees can be pretty arbitrary)
Underwriting (these fees can be pretty arbitrary)
Prepayment Penalty (the fee paid if you pay off your loan early)
The following fees are almost always “junk fees”: amortization schedule fee, trustee fee, financing statement fee, appraisal review fee, credit report review fee, document preparation fee, inspection fee, photo inspection fee, underwriting fee, warehousing fee, administrative fee, computer fee, courier fee, and overly high notary fees
When you ask about your interest rate, also ask about the APY (or Annual Percentage Rate) which is usually higher and a more accurate reflection of your true interest rate.
6. Generally, avoid adjustable rate loans. Adjustable rates can be attractive because the advertised rate is lower than a fixed rate. They generally allow you four payment options:
minimum payment (NEVER make only a minimum payment. It won’t even cover the interest on your loan and can quickly lead to a situation where your home is worth less than your loan)
“interest only” payment (also not recommended. No money is going to pay down the loan or create home equity)
a fully amortized 15-year loan
a fully amortized 30-year loan
The later two are similar to traditional loans, except that your interest rate is adjustable.
Here are three reasons to consider an adjustable rate:
IF you know for certain interest rates can’t go up from current levels
the loan ceiling on the adjustable rate is below the current fixed rates
you plan to sell your home prior to the first rate adjustment
Here are five questions to ask about your potential ARM rate: Adjustable rate loans often start with a “teaser rate”. This is an artificially low rate which will get adjusted higher at the first adjustment opportunity. If you do consider an adjustable rate, be sure to ask:
what is the rate based upon (often a current T-bill or LIBOR rate plus an additional amount). Get complete details
what would be the rate today if you already had the loan and it adjusted to current levels
what is the floor (how low can the rate go from here)
what is the ceiling (what is the highest rate you would have to pay)
how often can the rate adjust.
Be sure you fully understand each of these parameters, and get them in writing. Note: if you can’t afford the loan ceiling and the fully amortized payment at that level, don’t accept the loan.
Looking For The Right Home Loan For You
7. The mortgage industry is unregulated. Mortgage brokers are not banks and don’t play by the same rules. There are countless stories of “bait and switch” with people being promised one thing and ending up with another at the closing table. You do not have to accept any last minute changes. While inconvenient, just walk away. (They are betting you won’t). Lets say you have found the rate and lender with which you wish to work. Here are twelve warning signs telling you to walk away from the loan. Any one is enough for you to terminate the loan right then and there.
if the loan rep encourages you to borrow more than you need — walk away!
if the loan rep prods you to overstate your income or understate your outstanding loans or expenses — walk away!
if the loan rep tries to get you to agree to payments that you can’t afford — walk away!
if the loan rep asks you to sign blank forms — walk away!
if the loan rep won’t give you copies of every document you signed — walk away!
if the loan rep fails to give you mandated disclosure documents — walk away!
if the rep appears to pressure you — walk away!
if the rep is unresponsive to your calls, is disorganized, repeatedly asks for the same documents, or is constantly blaming others for delays — walk away!
if they try to sell you credit insurance or extra products you don’t want — walk away. (If you actually want the credit insurance, shop around to get the best rate)!
if they try to make you do something that is against your better judgment — walk away!
if they require you to deed your property to anyone — walk away!
if the loan rep changes any of the terms of the loan at closing — run, don’t walk! Be aware that the further in the process you get — the more momentum builds — the tougher it is to back out. Dishonest lenders know this and are counting on it.
8. Generally, see if you can avoid paying for mortgage insurance. Some loans require mortgage insurance. Others will waive the insurance if you have a low enough debt-to-home equity ratio when you take out your loan. Most mortgage insurance protects the lender, not you.
9. NEVER make the just the minimum loan payment. In less than two years you could find yourself owing more than your home is worth. Always pay at least the full interest payment, and it’s best to make a regular payment which includes both principal and interest.
10. Always make your full payment each month, pay on time, and pay more towards principal if you can.