Monday, August 4, 2008
After being pre-qualified for a home loan, looking at homes for sale in your area, making an offer to purchase, and ultimately entering escrow, it is time for most prospective home buyers to officially arrange some sort of loan in order to purchase a house. Luckily for them, there are a lot of choices in the marketplace and the interest rates for home loans are generally low when compared to hard money and lines of credit loans. The following are a few key points that home loan shoppers will want to clarify with any vendor they are considering obtaining a home loan through:
Interest Rate – This is the rate you will be paying back to the bank on the money borrowed. Ideally, you want as low a rate as possible although there are the following other factors to consider:
Loan Structure - The following are just some of the choices with regards to structure:
Adjustable – The interest rate of the loan will adjust with the money index it is tied to. If that index goes up, so will your interest rate. If it goes down, your interest rate will reduce as well. Adjustable rates are not for everybody as they can lack the peace of mind that a conservative fixed rate loan may provide. They do, however, serve a purpose and may be a good choice at a time of high interest rates or for somebody not looking to hold the property for a long time.
Interest Only – The payment you make is only for the interest on the loan. Your payments will not pay down the principle and reduce your loan balance. Typically, an interest only loan lasts for one to five years before switching back to a principle and interest payment. At this time, you have to pay the entire loan amount in a shorter time frame, say 25 years instead of 30, resulting in a larger monthly payment. The pros and cons are similar to an adjustable rate mortgage.
Fixed – A loan with a fixed or stable interest rate for the duration of the loan.
Conventional – A general term used to describe a loan from a private sector lender with a fixed interest rate.
FHA – A loan subsidized by the Federal Housing Authority, sometimes able to provide 100% financing to qualified buyers. Usually entail a little more paperwork and stricter borrower guidelines.
VA – Loan available to veterans and their spouses with similar guidelines as FHA.
Loan Term - A home loan can be of any term from 0-40 years. The longer the term, the less the monthly payment and the shorter the term, the more you’ll pay monthly. The typical home loan is for 30 years although it is very common for owners to refinance and stretch that term out over many more years.
Points and Fees – Typically, it is wise for buyers to pay a “point” to buy down the interest rate on their loan. A “point” is slang for a fee in the amount of 1% of the loan amount. It is also known as a loan origination fee. For a $400,000 loan, this translates to $4,000. There are zero point loans available to most home buyers but the catch is that you will pay a higher interest rate. You can always pay more than one point to buy the interest rate down further.
Other fees to watch are for processing, underwriting, administration, document preparation, wiring, courier, and notary fees. Typically these extra fees should be substantially smaller than the point charged but you’ll want to have us look at your good faith estimate in order to determine if you are getting a good (or realistic) deal.
Prepayment Penalty – If you plan to sell or refinance the house any time in the near future, you definitely do not want to have a prepayment penalty. In fact, most loans today should not have a prepayment penalty but often lenders will try to slide them in to the unknowing home buyer. A prepayment penalty is a steep fine assessed if you ever want to pay off the entire loan amount before a certain date.
Private Mortgage Insurance – Recently, many lenders are starting to require the payment of private mortgage insurance by the borrower. Private mortgage insurance, or PMI for short, is an insurance policy paid by the buyer in order to protect the bank from the buyer in case of default. PMI can be calculated into the loan and borrowers need to ask their lender if their loan will carry PMI and how much it will cost.
Choices of Lender - There truly are so many choices with regards to mortgage companies that the decision is often overwhelming. Experience has shown that almost everybody promises the world, but few ever deliver. In an effort to save some people future headaches, we've put together a list of preferred vendors for Orange and Los Angeles County home loans. We strongly urge consumers to use these vendors as they have saved many loans for our clients who had originally elected to get a loan elsewhere only to have the company’s claims prove to be empty promises.
Locking Your Loan – The decision to purchase your loan is an orchestration in timing. This is done sometime during the escrow period and is best discussed with your lender and us in order to best weigh the situation and all of its implications. Please avoid procrastinating in the lock of your loan in hopes that interest rates will decline. Unless you have very good reasons for waiting, delaying the loan lock can have disastrous consequences on your home purchase.
Home buyers need to understand that all of these factors weigh into the worth of a home loan, not just the points or interest rate. It is very common for a loan to look terrific when only a few of these factors are considered, only to have it look horrible when all the values are assessed. We urge you to use this checklist, ask lots of questions, have us review your good faith estimate, and ultimately save a big headache by using one of our preferred lenders. After this many years in the business, we have seen it all and have consciously chosen to work only with the best home loan providers. Please take advantage of this.