Although the mortgage industry has seen turmoil over recent years, many of the standards for consumers when shopping for a mortgage loan have remained constant. If you have good credit and are looking for a mortgage, banks have the money to lend. Here are some tips for shopping for the right mortgage.
– Do you want to find a bank first, and shop for a mortgage second? For many people, the process of looking for a mortgage has been to shop for the loan and see what banks can make the best offer. That might be the right choice, but you should first consider whether you have a particular bank that you would like to deal with. Many banks will give better treatment to a customer who has more than one account. In addition, you might prefer to have your loan through a bank with a local branch. Instead of finding yourself on a phone line to a distant customer service office, you have the opportunity to go to your local branch office and talk to the same loan officer who opened the loan. If that is something that you value, it would pay to see if your bank has a loan that meets your needs, instead of telling a mortgage broker to find you a deal from a bank that you will never see. However, if you are going with your favorite bank, make sure that you ask whether they will continue to hold the loan. Many banks, once they have settled the terms of the loan, will sell that to a third party. This would defeat the purpose of you going with your local or favorite bank, so ask before you sign the papers.
– As for the loan terms themselves, your basic choices include: the term, the interest rate, points, whether the rate will adjust, and payment frequency.
The term of the loan is the number of months that you will take to repay it. The most common has been thirty years, although you can also get a loan for fifteen or twenty years, or for longer than thirty, such as forty or even fifty years. Banks usually approve a loan based on the monthly payment and how that payment compares to your income and other debts. Because longer terms mean that you will be paying a little less each month, a longer term loan will tend to allow you to buy a more expensive house. The advantage to a shorter term is that you are paying far less in interest over the course of the loan. For example, a 30 year loan for $150,000 will cost you about $83,000 in interest in the first ten years. That same loan with a 15 year repayment will cost you only about$67,000 in interest in the first ten years. But the payment will be higher: about $1,200 as opposed to$900 for the 30 year loan.
Interest rates are partially outside of your control, but most banks do offer a variety of combinations of interest and “points” (basically pre-paid interest). By adding upfront payments when you buy the house, you negotiate a slightly lower interest rate for the life of the loan. Banks will also charge a higher more for large loans, called jumbo loans. And although rates tend to respond to market influences, banks will reserve their best rates for the best credit risks. One way that you can improve the rate that you are able to negotiate with the bank is to improve your credit record. Late payments, excessive debt, and frequent credit inquiries can damage your credit score.
The choice between an adjustable rate mortgage and a fixed rate mortgage depends largely on your willingness to tolerate risk that your payment will go up in the future. Adjustable rate mortgages periodically change their interest rate, and the new rate can mean an increase of hundreds of dollars per month. The advantage to an ARM is that often the interest rate on them is lower than a similar fixed rate loan, at least at first. The terms to consider when shopping for an ARM are who many years the rate will stay the same, how often it adjusts, whether there are any limits on the amount that it can adjust, and the way the adjustments are calculated.
One final option that many people do not consider is whether to set up a payment frequency more often than once a month. If your mortgage is going to be your largest monthly expense, and for many of us it is, you might consider shopping for a loan that will allow you to pay twice a month. It allows you to take payments out of each paycheck, instead of saving one giant payment for the first of the month. Not all banks offer this, but even if your bank does not you can almost always make half of your payment early, and in effect have turned your monthly payment into two semi-monthly payments.