Monday, September 26, 2011

Got lender? 5 Mortgage Shopping Tips

The whole process of shopping for a mortgage can be intimidating, but if you follow a few simple guidelines you will be able to choose the best lender and loan for your needs.

Know what you can affordLook at your budget to see where your money is going now.  The best online calculator that I have found is this Suze Orman Budget Calculator. Plug in all your numbers and then see how much you have available for a house every month. You also need to start thinking about your down payment Dinkytown has lots of good calculators available to help you create a savings plan and also has many different mortgage calculators for you to see how much you can afford with your current budget. 

Compare mortgage rates. Not all loans or brokers are created equal. A common term you will hear while shopping for a mortgage is APR Annual Percentage Rate. APR is the rate that you will be quoted on your mortgage, but that number does not include fees charged by the lender that may be included or intra-year compounding. The measure that does consider those is called APY or Annual Percentage Yield. There is an excellent explanation of the APR and APY in Investopedia. Buyers looking for a loan need to consider comparing the APY's of different loans instead of just the APR. 

Understand mortgage pricing and fees. Mortgages are priced depending on the borrower's credit, the amount of loan and the overall risk of the mortgage. MyFICO has a chart that shows the affect of different credit scores on the mortgage rate offered. Today, a borrower with a 760 score might be offered a rate of 3.79% while a borrower with a challenged credit score at 620 might be offered 5.38%. That amounts to a difference of over $285 per month on the cost of your mortgage. Buyers also need to look at lender fees like processing fees and points. Each point on a mortgage represents 1% of the total loan amount. A lender with a lower rate may have much higher fees or may be charging more points to lower the mortgage rate. The Federal Reserve has information on comparing mortgages from different lenders including a mortgage shopping worksheet that buyer can use to ask prospective lenders for the information that will allow a fair comparison of different loans.

Know the risks and benefits of the mortgage typesMortgage loans are designed to fit borrowers with different financial needs and timetables. Many buyers in the last few years chose a mortgages that adjust to a higher rate after a short time called ARM's or Adjustable Rate Mortgages. Payments start at a low rate and were scheduled to increase to a higher mortgage rate commonly in 3, 5 or 7 years. When the payment increased on those ARM's, owners were unable to pay the higher payment. Some borrowers still choose ARM's as a way to stretch to buy a home that would otherwise be unaffordable, others choose ARM's because they only intend to stay in the house for a short term. All buyers need to think about what will happen if they cannot afford the new payment or are unable to sell when the mortgage adjusts. Fixed mortgages offer more stability and come most commonly in terms of 15 or 30 years. The payment for a fixed rate mortgage does not change over the term of the loan. They are safer and are more resistant to inflation, but the loan payment can be higher than the initial payment on an ARM. Buyers should choose a mortgage option that will fit them no matter what future rates or markets do. 

Ask until you feel comfortable with the answer. You can find mortgage information like on sites like Mortgage Professor or ask lending professionals your specific mortgage question on sites like Zillow Advice. Do not be intimidated to ask questions or pressed into choosing a specific lender. You need to choose a lender with a competitive rate who is knowledgeable and professional. That will make all the difference when you find the house you want to buy. 

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