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Your Home
is an Important
Investment
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Refinancing
Shopping For Your Best Mortgage Deal
You should plan to contact several mortgage lenders,
including the lender to whom you presently make your payments (if
applicable), to discuss the mortgages
they have available, their rates, closing costs,
and other fees. A good place to start is in the real estate section
of your local newspaper. You can also look for the names of lenders
in the yellow pages of your phone book under "Mortgages." Mortgages
are available from mortgage companies, savings and loan associations,
banks, credit unions, and other financial institutions.
Because there are so many variables, you'll need
a systematic approach. In this section you can view a mortgage comparison
chart that will help you ask lenders questions about the terms of
the mortgages they offer. Use this chart to get the information
you need and to make an informed decision on which mortgage lender
offers the best deal for you. Remember, some information (especially
interest rates)
can change daily.
1. Company Name/Phone Number:
Write down the name of the loan
officer with whom you speak, so that you can get back in touch if
you decide to apply for a loan at that financial institution.
2. Mortgage Type:
Your task will be simpler if you've narrowed your search to the
type of mortgage loan you prefer. When comparing mortgages among
lenders, compare the same loan among the lenders you call -- in
other words, a 30-year fixed rate with a 30-year fixed rate, a one-year
Treasury adjustable
rate mortgage (ARM) with a one-year Treasury ARM, etc.
3. Interest
Rate and Points:
Interest rates change often, even daily.
Make sure you record the date of your rate quote. Try to call all
lenders on the same day, so that you have an accurate comparison.
Another way to evaluate rates is by examining the annual percentage
rate (APR). It indicates the "effective rate of interest paid" per
year. The figure includes points
and other closing costs and spreads them over the life of the loan.
While the APR provides you with a common point for comparison, it's
important to look at the whole product before deciding which mortgage
to get.
4. Interest Rate
Lock-ins:
When a lender agrees to hold the quoted rate for
you, this is called a "lock-in." Ask when the rate can be locked
in, at the time of application or only upon approval? Will the lender
lock in both the interest rate and points?
Can you get a written lock-in agreement? How long does the lock-in
remain in effect? Is there a charge for locking in a rate?
5. Minimum
Down Payment Required:
Ask the loan officer what the lowest
allowable down payment
is -- with and without private
mortgage insurance (MI). If MI is required, ask how much
it will cost. Find out how much is due up front at closing and the
amount included as monthly premiums. Ask if you can finance the
closing cost of MI. Also ask how long MI will be required. In some
cases, lenders may be willing to cancel the MI when your loan balance
drops below a certain percentage of the value of the property.
6. Prepayment
of Principal:
Some lenders charge borrowers a prepayment
penalty if they pay the loan off early. If you think you may sell
your home before the loan is paid off (most mortgages are repaid
early) or plan to make principal
payments before they are actually due, you need to know if there
will be a penalty and for how long it will remain in effect. Some
penalties are in effect only for the early years of the loan.
7. Closing Costs:
Closing costs are fees required by the lender at closing and can
vary considerably from one financial institution to another. Ask
specifically about the application fee, origination
fee, points,
credit report
fee, appraisal
fee, survey
fee (if required), lender's attorney fee, cost of title search
and title
insurance, escrow, transfer
taxes, and document preparation fee.
8. Financial
Index and Margin:
The interest rate on an adjustable
rate mortgage (ARM) is determined by adding a margin
or spread to a specified financial index. This is called the fully
indexed rate. Find out both the financial index used (Treasury,
Certificate
of Deposit, Cost
of Funds, etc.) and the margin (that is, how much higher
is the ARM rate than the index rate?).
9. Initial Interest Rate:
Is the initial rate quoted the fully indexed rate or a lower introductory
rate, sometimes called a “teaser” or Introductory rate? A teaser
rate may sound like a bargain today, but it may turn out to cost
you more in the long run. This low rate lasts only until the first
adjustment. After that, you will be charged the fully indexed rate,
at which point your payments may become unmanageable.
10. Adjustment
Interval:
How often can the interest rate be adjusted --
every six months, one year, three years, five years? A loan that
adjusts its interest rate after six months is called a six-month
adjustable
rate mortgage (ARM); after one year, a one-year ARM; etc.
11. Rate Caps:
Rate
caps limit how much your interest rate can move, either up or down.
Periodic caps limit the change per adjustment period, and a lifetime
cap governs the maximum amount the interest rate can increase or
decrease over the life of the loan. For example, you may find a
one-year adjustable
rate mortgage (ARM) with a 2 percent periodic cap and a
5 percent lifetime cap. If this one-year ARM is originated at 6
percent, after the one-year adjustment period it could be adjusted
upward to as much as 8 percent, or downward to as low as 4 percent,
depending on the movement of the index.
Remember to consider the adjustment interval when comparing rate
caps. The one-year ARM just described could reach its lifetime cap
of 11 percent (original interest rate of 6 percent plus lifetime
interest rate increase of 5 percent) in three years if interest
rates rose steadily. A three-year ARM would just be making its first
adjustment after such a three- year period.
12. Payment Caps:
Payment caps may appear similar to rate caps, but do not be misled.
While they can limit how much your monthly payment increases, they
do not restrict the interest rate from going up. Many adjustable
rate mortgage (Arms) with payment caps have no corresponding
interest rate caps. As a result, you may end up paying the lender
less than the amount of interest you owe each month. If this happens,
this unpaid interest is added to your loan balance, and the principal
amount you owe increases rather than decreases with each payment.
This is called negative amortization -- and generally should be
avoided.
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