5 Tips for First-Time Borrowers
- Kirk HaverkampDecember 24, 2012 - MortgageLoan.com
If you’re thinking about buying your first home, that probably means you’re also going to be taking out your first mortgage. Though the process can be confusing, here are a few key things you can focus on to successfully navigate the hazards.
1 - Don’t fixate on the interest rate
When people start shopping for a mortgage, the first thing they do is look for a low interest rate. Which makes sense, because the interest rate is a major factor in determining what the loan will cost you.
But it’s not the only factor. Inexperienced borrowers often end up getting a poor deal because they choose loans with low rates that have other features that raise the overall cost considerably. In fact, it’s not uncommon for such features to boost the cost of a loan by the equivalent of half a percentage point or more!
The most common way of hiding the true cost of a mortgage is through fees. Whenever you take out a mortgage, you have to pay a variety of fees for originating and processing a loan, which can vary greatly from lender to lender. These fees are usually rolled into the mortgage itself, meaning you’re starting out with a bigger loan balance – and perhaps higher monthly payments – than you would on another loan with lower fees.
2 - Pay attention to fees
As we mentioned above, mortgage fees vary from lender to lender. Different lenders may charge different amounts for the same fee, they may charge fees other lenders do not, and they may have different names for the same fees. This is where comparing mortgage offers can get really complicated.
You may have heard a lot about “junk fees” and how important it is to avoid them. Basically, junk fees are charges for routine things that you really shouldn’t be billed for – they’re either things that should be covered under billings for other services or don’t reflect any actual service performed. Some lenders include these as a way of padding their profits and a careful borrower can identify these and demand they be removed from the list of charges.
The good news, though, is that you don’t have to go through your list of lender charges with a fine-toothed comb to avoid getting taking advantage of by junk fees. The key thing is the total amount of fees the lender charges, along with the interest rate. If one lender’s total fees and interest rate produce a lower monthly payment than another lender’s (assuming you’re including the fees in the amount borrowed), that’s typically going to be your best deal. Simple enough.
3 - Understand discount points
Discount points are a special type of fee that’s commonly used to lower an interest rate. In essence, they allow you to buy a lower rate by prepaying a certain amount of interest. But lenders often use them to create an unusually low “teaser” rate for use in advertising that’s based on more points than you would be likely to buy.
They way they work is that each discount point cost 1 percent of your loan amount and lowers your rate by a certain amount – often by a quarter of a percentage point. So if you’re borrowing $250,000 and normally would pay a 4.5 percent rate, buying two points for $5,000 would get you down to a 4 percent rate.
When comparing mortgages from different lenders, it’s best to start out by comparing offers with no discount points included so you know you’re comparing apples to apples. If you like, you can then decide to buy one or more discount points if you think it would be advantageous to lower your rate.
Discount points can save you money if you’re planning to stay in the home long enough for the savings from the lower interest rate to offset the additional cost of buying discount points. But if you expect to move again within 5 years or so, or may refinance within that time, you’re probably better off without them.
4 - Shop around
A mortgage is the biggest financial commitment most people will make in their lives, but it’s amazing how many people simply grab the first or second advertised offer that looks good, or go straight to the bank where they have the rest of their accounts.
A mortgage is a lot of money. And small differences in the interest rate and other loan terms can really add up over the years. Do yourself a favor and spend a few weeks learning about mortgages and researching offers from different lenders.
Ideally, you want to look at offers from at least five or six different lenders to see how their rates and costs vary. Check into large and small lenders, credit unions and at least one broker or two to what they have to offer. A broker’s job is to sift through loan packages available from various lenders to find the best one for you, so they can simplify the task, but you don’t want to let them do all your mortgage shopping for you – check into a few offers independently to see whether you can get a better offer.
The easiest way to compare loan offers from different lenders is to look at the Annual Percentage Rate (APR) , which is a way of expressing the total cost of a loan in terms of an interest rate. Generally speaking, the lower the rate the better, but to be absolutely certain, you should work through the details of individual loan offers using a mortgage calculator.
5 - Use a mortgage calculator
A mortgage calculator is one of the most valuable tools you can have when shopping for a mortgage. It lets you enter all the important data, including loan amount, interest rate and fees, and calculate what your monthly mortgage payment would be. It makes it easy to see how different combinations of fees and interest rates play out in terms of what you actually end up paying.
Some mortgage calculators also let you display amortization schedules, which show how fast your mortgage balance would be paid down over time, along with your accumulated interest payments. These are useful for seeing the total cost of your loan, and can also be used to decide whether to pay for discount points, because you can see how much your savings in interest would be over time.
Lenders will provide you with their total fees and interest rate when they give you a quote, but they really aren’t committed to those until they provide you a Truth-in-Lending statement. Under federal law, lenders must provide you with a Truth-in-Lending statement, which lists all fees and the interest rate, when you apply for a mortgage. Doublecheck this to make sure the numbers match the quote you were given. It’s also not a bad idea to apply with more than one lender just so you can compare Truth-in-Lending statements to get an accurate picture of all fees and charges before committing.
Originally published on MortgageLoan.com at: http://www.mortgageloan.com/5-tips-first-time-borrowers-9324
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