Unless you’re in the industry, I think we can all admit that home buying is a little complicated. From finding a home to financing it, there are so many industry terms and options that it’s enough to make your head spin. Should you go to your local bank? Should you shop around multiple lenders? Should you use a mortgage broker? If you are considering your local bank, you should know that banks only lend their own money, so they will have limited options when it comes to financing. Shopping around with multiple lenders is a huge time commitment, and you don’t want multiple places having access to your most sensitive information and pulling your credit over and over. Using a broker is a great option because it opens you up to even more possibilities – they only pull your credit once and then they shop the hundreds and thousands of options available to get you the best deal. But here’s the best part: you don’t pay a broker any fees whatsoever to secure your loan, instead the lender pays a commission to them for bringing them a loan. Plus, they are required to be licensed and complete continuing education annually, unlike a bank loan officer, who is not subject to the same.
So how do you navigate the waters of financing your dream home? Working with a broker is a great first step. Doing some simple research and asking some questions like the ones below can help you understand what is best for your unique situation.
What is the total payment? The “mortgage” part of the mortgage payment is only one component. You may have heard the term “PITI” thrown around. The PI, which stands for principal and interest is essentially the “mortgage” payment. The TI stands for taxes and insurance. Your mortgage payment will always include the principal and interest, but your total payment can also include real estate taxes, hazard insurance, any HOA (homeowner’s association) fees, and possibly PMI (private mortgage insurance). That total number has to fit comfortably into your budget before proceeding, so be sure you understand everything involved.
How long is the rate you quoted good for? The lower the rate you qualify for, the lower your payment will be. Even though rate isn’t the only thing you need to consider, make sure you know when the “rate lock” will expire when you are given a figure. Lenders will allow brokers to “lock” the interest rate quoted, which means it can’t fluctuate during a set period of time. Be sure to keep communication open with your Realtor and Broker so that you can complete the entire transaction within that rate lock period so it doesn’t end up costing you more money.
Do you charge any points, fees, or closing costs? There are always standard fees that you just cannot avoid when taking out a mortgage. For example, you have to prepay a certain amount of interest and/or taxes and insurance ahead of time into your escrow account, pay a title attorney fee, processing and origination fees, and other things necessary to the successful completion of your loan. You may also see “points” included – these are prepaid interest paid at closing that entitles you to a lower interest rate over the life of the loan. A “point” is 1 percent of the total loan amount. If you qualify for a higher rate, you may be able to buy down that rate with points, which may also be tax deductible (consult a tax professional on that). Speak with your loan professional on whether or not this makes sense for you. Either way, the lender has to, by law, provide you with the “APR” which is the annual percentage rate that incorporates all fees.
TIP: While you may see lenders and banks advertise “no closing costs” loans, this is not entirely the truth. When you see “no closing costs” what this means is that you probably qualified for a lower rate, but the lender charged you a higher rate and used the additional compensation they were provided to essentially pay off and “remove” the closing costs. Don’t let that detract you from getting a better loan with someone else.
What type of mortgage should I choose? Mortgages and certainly not one size fits all. There are many different programs and options available. Don’t assume you have to have a 30-year fixed mortgage, or that you have to put down 20%, or that a fixed rate is even the best option. A good Loan Officer will sit down with you, understand your goals and what you are trying to achieve and find the best option. Maybe you need an interest only loan for a certain period of time and then you can refinance into a fixed loan. Maybe your property is eligible for USDA (US Department of Agriculture), which allows for lower credit scores and low to no down payments. It all depends on your unique situation.
How much should I put down? Similar to above, depending on the option that is best for you, your down payment can vary. For example, programs like USDA and FHA (Federal Housing Administration) allow you to put zero to three and a half percent down as a down payment. Of course, the more you put down on a mortgage, the better your payment will be. It all depends on what is best for your unique situation, and your Loan Officer should walk you through all your options.
TIP: If you do have a down payment fund built up, be sure to know how much you will need to pay out of pocket at closing and consider the costs that you will need to cover after closing. If you are moving, you will need moving supplies and to pay a moving company or rent a truck, you may want to touch up paint or do some small maintenance, or buy some new furniture, etc. Be sure you have enough money to cover all the expenses that can come up after you’ve made the down payment.
Why do mortgages get declined? Getting a pre-approval and locking your rate does not automatically guarantee everything will proceed smoothly. A myriad of things can happen after that point. A pre-approval means at that point in time, you qualify for that quoted rate, down payment, and program. From then until closing, if something changes – you change jobs, lose a job, your credit score changes, you add debt like a car or other large expense, something happens to the house itself, etc – the whole thing can be in jeopardy. The best thing is to make sure everything stays status quo from the time of pre-approval to closing.
How long will the process take? Once you enter into a purchase and sales contract, or decided to apply for a refinance, there are certain deadlines you have to adhere to. Be sure to work with someone who has a proven track record of getting it done on time. No matter what, time is of the essence. Missing deadlines can be very costly.
Working with a broker, like South County Mortgage, can you save you time and money because they have only your best interest at heart. You’re always in better hands with a broker – they shop multiple lenders on your behalf, and you don’t pay them to do so. They have the best options available, and are held to higher educational and professional standards than a typical bank officer. In fact, asking your broker any of the 7 questions above might not even be necessary – they typically will go over all this information with you up front, so you are in the know about everything that comes along with your mortgage.
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South County Mortgage is a licensed mortgage brokerage providing better than bank service and better than bank rates to Rhode Island residents for over 20 years. Visit our website for more info, www.scmtg.net.