Shopping for a mortgage is not quite as easy or fun as shopping at a farmer’s market or the mall.
There are lots of terms, lots of players in a real estate transaction, and new loans are being created all the time.
Here are a few tips:
Figure out what loan type you want (30 year fixed, option payment, etc.)
Get quotes from different lenders on the same loan program
Keep in mind that the quoted rates aren’t your actual rates until a lender locks in your loan
See if accepting a voluntary pre-payment penalty will lower your rates, and if this is the right option for you
See if you can do a full documentation loan, because this may provide you with a lower rate
The right loan
This is a judgment on your part. You may want a 30 year fixed loan and pay this loan down over time. These monthly payments may be a form of “forced saving” by building equity into your loan.
Your goal may be to get a lower monthly payment, such as interest-only payments or a 40 year loan.
You can consider how long you want the loan fixed. Keep in mind that the longer you fix a loan in general the higher the interest rate will be. Nowadays the difference is not much, so some people opt for the higher expense of a loan that is fixed for longer.
Comparing quotes
You can get quotes for free from different sources – your friendly neighborhood bank, a mortgage broker, an online lender, etc. Some will ask you to compensate them for the cost of checking your credit, but this is usually a small fee.
The key to comparing quotes is to make sure they are for the same loan type. Comparing a quote for a 30 year fixed loan with a 5 year interest-only loan is like comparing apples and oranges.
Changing rates
The rates you are quoted are based on current market rates. A quote from one lender on a Monday may be different than a quote they offer on a Tuesday. Comparing a quote from one lender with another quote from a lender you get several days later may not be helpful.
Prepayment penalty
A prepayment penalty is a penalty for getting rid of the mortgage through a refinance or by selling the property. This is usually based on time, such as 1 year or 3 years.
The penalty is usually based on the loan size and interest rate. Lenders use different formulas for this. Some have higher prepayment penalties than others.
A prepayment penalty can also be “hard” or “soft”. A hard prepayment penalty is triggered by either a refinance or sale of the property. A soft prepayment penalty is only triggered by a refinance. The soft prepayment penalty thus gives you the option to sell the property without financial penalty.
Why accept a prepay? Lenders will generally offer a lower rate if you accept one.
If you plan on keeping a house for 5 years, then a 1 year prepayment penalty may work. If you plan on moving in 6 months, then a 2 year prepayment penalty may not work.
Full documentation or not
Lenders generally give the best interest rates to people who fully document their loan (all other factors such as credit being equal).
Full documentation can be about:
Your income (paystubs)
Income history (tax records)
Assets (bank statements, retirement accounts)
Job verification
Many lenders will allow you to provide less documentation – sometimes very little. Their rates are generally higher. Some lenders will allow you to document some items but not others. A lender often has all kinds of loans – full documentation loans, partial documentation, no documentation, etc.
Loan types can include:
Full doc (full documentation)
SISA (stated income, stated assets)
Stated income, verified assets
Other hybrids
Some people can’t document income properly because they are commission-based and their income fluctuates. Other people are reluctant to share financial records.
If your loan size is smaller relative to the value of the property, then there may not be much difference between a full documentation and stated documentation loan. For example, if you want a $250,000 loan on a $500,000 property purchase you are putting down 50% so lenders are less worried about your ability to pay (they can always seize the property and sell it for more than their debt).
For more information visit www.archerpacific.com Loan Library.
The author is the owner of Archer Pacific, a mortgage company. The firm's website, http://www.archerpacific.com, has extensive resources and tips on many mortgage topics.
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