When shopping for a new car, most people first decide on a make, model, and a list of optional features they would like. Car buyers know you can’t find a good deal unless you know exactly what you’re looking for. When it comes to mortgage loans people don’t have a clue what they want or how to shop. A mortgage is a major financial decision and most people leave this decision in the hands of a total stranger. This is why many people end up with an over priced mortgage loan that does not fit their needs.
Before you start shopping for a mortgage loan you need to decide what type of a mortgage would best meet your needs. The different types of mortgage loans are: fixed rate mortgages and adjustable rate mortgages. If you choose an adjustable rate mortgage loans you may receive a lower interest rate and monthly payment in the introductory timeframe; however your payments could rapidly increase as interest rates rise or when your introductory tie ends. Fixed-rate loans have the advantage of offering you a fixed payment amount that will not increase. There are other considerations to make when selecting a mortgage. You need to consider using an escrow account for your property taxes and insurance. Another option is an interest only mortgage loan which could be a good idea for someone who is only planning on staying in the property for a few years. You will need to decide on a term for your mortgage loan; this term is used to determine your monthly payment amount. The longer your mortgage term, the shorter your monthly payments will be; however, you will also build equity at a much slower rate. You have the option of select mortgage terms from 10 to 40 years.
Something to consider that could lower your interest rate is pre-paying points on the loan. Points are fees you pay the mortgage lender at closing time. For example if you take out $100,000 and wanted to pre-pay two points, you would pay $2000 at closing. The more points you pre-pay on your mortgage the better your interest rate will be. You should consider paying points an investment in your home that will save you money. Your down payment is the amount you will pay beyond what your mortgage finances. The down payment you pay can also help lower your interest rate. If you don’t have at least 20 percent of the loan amount as a down payment you could be required to purchase private mortgage insurance (PMI). This insurance protects the mortgage lender from loss if you default on your mortgage. The insurance does nothing for you as a homeowner other than charge you monthly premiums.
When shopping for a mortgage loan pay careful attention to the “lock timeframe.” This lock is the amount of time your lender will guarantee your interest rate and points. Your lender can charge you more for longer lock periods; you will have to decide when to accept the lock period and for how long you want it.
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My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
