Mortgage Shopping

It is essential that you shop for the mortgage first, because once you start looking at houses, all reason will fly out the window.

Before you shop for a house, you need to shop for a mortgage. It is essential that you shop for the mortgage first, because once you start looking at houses, all reason will fly out the window. Interview lenders and ask about terms. Lenders can be banks, credit unions, and mortgage brokers.  You may want to interview one of each. People often overlook credit unions, but home loans are pretty much the whole mission of credit unions. The same is not true of commercial banks.

Not all mortgages are created equal; some are great, and others are positively dreadful. Your monthly payment is not just Principle and Interest. It also includes escrow for Property Taxes and Insurance, hence the term PITI. (Escrow is a holding account that collects an annual payment in monthly installments, then disburses the payments to the taxing authority and insurer at the appropriate time.) In pre-qualifying you, lenders will tell you the maximum advisable PITI based on your salary.  

Ask your lender to walk you through the pros and cons of each mortgage they recommend for you. Do not be afraid to ask questions. If the loan itself seems overly complicated and you do not understand how you are going to pay it, then do not take it. A home loan is a financial instrument created by the lender to make the lender money. Ideally, it should be fair to the borrower as well. History has shown us that not all lenders are fair, and that is why you should interview more than one.

Your lender should walk you through the mortgage terms methodically. Generally, the term (length of payments) and the type of interest (fixed or adjustable) are most important.  Keep the following in mind:

1. The length of the loan will typically be 15, 20, or 30 years. Generally, the longer the repayment period, the higher the interest rates offered. Remember that money has a time value. Inflation assures that the last dollar you use to pay off your mortgage will have significantly less buying power than the first dollar you paid.

A 30-year loan may seem like a terrible millstone around your neck, but the monthly payments due for a 30-year loan will likely be smaller and more manageable than those for a shorter period. If you have the money, you can also pay one extra principle and interest payment directly to principle each year and reduce your 30-year mortgage to a nineteen-year loan.

2. The type of interest will be either fixed (set for the whole repayment period) or adjustable. If adjustable, carefully read the fine print—how often and how much can the lender increase the interest rate? (Please read the sidebar on Loan Term Definitions if you are unfamiliar with mortgage loans.)

Suppose someone tells you that a 15-year fixed interest loan with a low rate is better than another type of loan. Not necessarily. Interest rates vary. You could be buying during a spate of relatively high interest rates and an adjustable loan with a very low interest rate that cannot re-adjust more than a point after five years may suit you fine. This is especially true if you plan to buy a modest starter house and move up when you can afford it.

Once you have decided which loan is right for you, ask your lender to prepare a Good Faith Estimate for Settlement. This will list all the reports and the likely cost of each one necessary for finishing (or settling) your real estate purchase.

Loan Term Sidebar - Here is a list of some of the items you might discuss with your lending candidates:

  1. Loan Origination Fee – Generally, 1 to 1.5% of the loan that you pay to the lender up front as their compensation for making the loan.
  2. Points – Each point is one percent of the loan amount. This is pre-paid interest that may help you lower the interest rate for the term of the loan. In a low interest rate environment, like the one we’ve had for over a decade, one seldom sees points.
  3. Underwriting or Application Fee – a flat fee the lender may charge to complete the voluminous paperwork necessary to get you the loan. (This should include the cost of obtaining credit reports for all co-signers.)
  4. Private Mortgage Insurance (PMI) – This is a policy for which the borrower pays, but only the lender benefits. PMI assures the lender that if you don’t pay your loan, the policy will. Generally, you can avoid PMI by either putting 20% down on a house or getting a loan from a credit union instead of a bank.
Tea Cup

Get In Touch

Skip to content