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Deciding on the Right Mortgage

Contributed by: Heath Combs

Couple_Buying_Home_With_BoxesBuying a home is an exciting time and can be a long process as buyers research homes and locations to target, then tour homes while trying to decide which house is perfect for their situation and their price range. The decision to purchase a home, and which to purchase, is one of the most important decisions a person can make.

However, deciding on the right mortgage is just as important, if not more so. There are a number of both fixed-rate and adjustable-rate mortgages on the market today, with variables including length of term, number of years of fixed payments, and interest rates. On the surface, mortgage shopping appears to be all about rates.

But if you only look at rates you could be overlooking some very expensive fees. There are several specific items you need to consider when shopping for a mortgage, along with some strategies for shopping and negotiating the best mortgage deal.

Understand your own situation

It’s a good idea to start the mortgage application process by pre-qualifying before you have selected a home to buy.

You also need to understand how much house you can afford. The industry standard for determining how much of a monthly payment you can afford is 28% of your gross monthly income. However, it is important to take your other monthly expenses into account when determining how large of a monthly payment you can handle, including: homeowners insurance, utilities, ongoing maintenance and property taxes. These items all need to be factored into your budget. If you have a realtor, he or she should be able to help you with many of these items.

Your goal in doing all this legwork is to avoid a situation where you end up house rich and cash poor. The goal is to be able to walk into your financial institution with a clear understanding of how much house you can afford and how much you’re willing to pay for a mortgage each month.

Finally, make sure your credit rating is in good shape. A credit rating above 740 generally qualifies for the best interest rates. Truliant offers a free No-Cost Credit Review for our members. A Truliant Member Service Representative will sit down with you, review your credit report, and help develop ways to improve your overall credit situation.

Cost information

You want to make sure that you ask lenders for the same information so you are comparing apples to apples. Specifically, you should ask for the following information:

  • A list of current mortgage interest rates, making sure you get the lowest quotes for that day or week.
  • Which rates are fixed and which are adjustable? Adjustable rates can rise or fall at various times during a mortgage.
  • For adjustable-rate mortgages, ask how your rate could vary and how often the rate could be adjusted.
  • Finally, ask for the annual percentage rate (APR). This represents a composite rate that includes points, broker fees and any other credit charges that you may be required to pay.

Down payment and PMI

Down payments generally represent the largest outlay of cash for a homebuyer. If you are trying to avoid Private Mortgage Insurance (PMI) payments, a down payment of 20% of the purchase price of the home is required. On a $250,000 house, a 20% down payment is $50,000.

If you can only do a 10% down payment – $25,000 on a $200,000 purchase price – then you will be forced to pay PMI. PMI – which protects the lender in case you default – costs between 0.5% and 1% of the value of the loan. With a $225,000 mortgage, a borrower will pay between $1,250 and $2,250 a year, or between $104 and $187 a month. That’s not insignificant – and the fee can go on for years until you have at least 20% equity in your home. However, once you’ve reached 20% equity in the home, you typically will no longer be required to pay PMI.

Paying points

Points are a fee that borrowers can pay to a lender in order to reduce the interest rate. The longer you plan to stay in a home, the more money you will save over the life of a loan by paying points.

Make sure you ask the lending institutions to quote the points in dollar amounts in order to fully understand how much you will have to pay, and ask them to show you how much you will save after five years, 10 years, 20 years and 30 years.

Fees

There are all kinds of fees that get loaded into the mortgage loan process. Some of these fees have to be paid in advance. Others can be wrapped into the mortgage, but that will increase your loan amount and monthly payments.

Ask each lender how these fees work and are applied at their institution:

  • Title insurance
  • Appraisal fee
  • Escrow fee
  • Credit report fee
  • Document preparation fee
  • Survey fee
  • Pest and mold inspection
  • Loan-origination fee
  • Broker fee
  • Closing costs

Negotiate

Like most consumer products, mortgage loans are usually negotiable. It’s to your advantage to make sure that the lending organizations know that you are talking with other organizations. Knowing that they are in competition for your loan business should work to your advantage.

Pre-approval

Once the above steps are completed, you should be ready to select the lending institution that you want to use. At this point, you should work with your lender to obtain pre-approval for your mortgage loan. You’ll fill out a mortgage application and provide the lender with your financial and employment information to allow them to do a financial background check and have a look at your credit rating.

Most sellers expect that you’ll have pre-approval from a lender, and many buyers will only negotiate with buyers who have proof that they can obtain financing. It is also becoming increasingly common for real estate agents to require a pre-approval letter from their clients prior to beginning a search for a new home.

Once you’re pre-approved, you’re ready to move on to the fun part – shopping for your new home!

Truliant can help

Truliant has a number of mortgage options and rates available. Get pre-qualified or apply online for your mortgage online today. Or schedule an appointment at one of our locations. We can also fill out a loan app for you over the phone by calling 855.293.2957.

Thinking about an adjustable rate mortgage? Calculate your monthly payment here.

Federally Insured by NCUA and Equal Housing Lender.

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