Imagine opening the front door of your dream house. There’s the family room with a vaulted ceiling. Flattering light fills the -- yes! -- walk-in master closet. The kitchen has shiny new appliances. Then you step onto the patio and find a huge, legalese-infested mortgage growing there. Oh, that’s not part of your four-bedroom fantasy? What about the sub-prime lending crisis and bucking-bronco housing market? Don’t worry -- a little knowledge goes a long way to securing the right loan for you.
Want to buy a home in the next six months? Fill out a preapproval application with your chosen lender. You’ll discover any potential credit hassles and what size loan you can land (not that you should house hunt with that top-end figure in mind). Couples should file this paperwork together to provide a full financial picture -- and ensure they both become part of the buying process.Bottom line:
Get your info in order fast. The early bird gets the low-anxiety loan.
The popularity of 30- and 40-year mortgages is a recent trend, fueled by lenders who rake in extra moola off of endless interest payments. Example: A $100,000 loan at 7% interest paid off over 20 years incurs $86,072 in interest, while the same loan paid off over 30 years incurs -- yikes! -- $139,509 in interest. (Plus, a shorter mortgage typically scores you a lower interest rate.) But is it worth it?Bottom line:
True, payments on a shorter term will be a bit higher, but frankly, if you can’t pay off a house in two decades, hunt in a more modest neighborhood.
Fixed-rate mortgages lock in current interest rates, keeping your monthly payments the same for the life of the loan. Adjustable-rate mortgages typically start with a lower rate, but after an initial period (1 to 10 years), payments can drop or rise with market conditions (swell if you like taking your paycheck to the racetrack). Bottom line:
Though mortgage rates have risen from recent historic lows, the average rate (hovering around 6.5%) is still a good enough deal -- a fixed-rate loan is probably the wisest choice if you qualify.
Pay More Now
If your down payment is less than 20% of the purchase price of your new home, you are required to obtain private mortgage insurance (PMI) to protect the lender in case you default. (The assumption is that since you’re not loaded, you’re a risk.) This “insurance” takes the form of an increased interest rate on the extra amount financed and can really add up over time. Wall Street whizzes may prefer to invest that down-payment cash -- a risky strategy unless you’re super-bullish on the market. Bottom line:
Strive for a down payment of 20%, even if that means settling for a home without that highly coveted wine cellar.
Be Sharp on Points
Points are a perplexing aspect of mortgage math. Put simply, a “point” is 1% of the loan amount paid up-front to the lender to “purchase” a lower interest rate. The more points you fork over to the lender, the lower your payments will be for the life of the loan. (Yeah, sounds sorta like a bribe to us too.) Unless you plan to own your new home for only a few years, paying points will help save you bucks in the long run. Bottom line:
Make sure your lender isn’t trying to stick you with a higher-than-average interest rate and multiple points.
Go for Broker...Maybe
Mortgage brokers are industry insiders who coordinate applications and shop around with multiple lenders to find good deals. (Many online lenders are actually brokers.)Of course, this service isn’t charity; a broker marks up the lender’s “wholesale” terms to the “retail” terms you see. But, if you have a relationship with a bank, that comfort level may outweigh any possible savings.Bottom line:
If you use a broker, choose an Upfront Mortgage Broker
, who will disclose the fees and wholesale offers of lenders.
Nestpert Jack M. Guttentag of MtgProfessor.com
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