Getting A Mortgage - How To Finance Your Home
Your choice of lender and type of loan will influence not only your
settlement costs, but also the monthly cost of your mortgage loan. There
are many types of lenders and types of loans you can choose. You may be
familiar with banks, savings associations, mortgage companies and credit unions,
many of which provide home mortgage loans. You may find a listing of some
mortgage lenders in the yellow pages or a listing of rates in your local
newspaper or by
searching these available mortgage sources.
Mortgage Brokers. Some companies, known as "mortgage brokers" offer to
find you a mortgage lender willing to make you a loan. A mortgage broker may
operate as an independent business and may not be operating as your "agent" or
representative. Your mortgage broker may be paid by the lender, you as the
borrower, or both. You may wish to ask about the fees that the mortgage broker
will receive for its services.
Government Programs. You may be eligible for a loan insured through the Federal
Housing Administration ("FHA") or guaranteed by the Department of Veterans
Affairs or similar programs operated by cities or states. These programs usually
require a smaller down payment. Ask lenders about these programs. You can get
more information about these programs from the agencies that run them.
(Links to the FHA, VA, and HUD)
CLOs. Computer loan origination systems, or CLOs, are computer terminals
sometimes available in real estate offices or other locations to help you sort
through the various types of loans offered by different lenders. The CLO
operator may charge a fee for the services the CLO offers. This fee may be paid
by you or by the lender that you select.
Types of Loans. Loans can have a fixed interest rate or a variable interest
rate. Fixed rate loans have the same principal and interest payments during the
loan term. Variable rate loans can have any one of a number of "indexes" and
"margins" which determine how and when the rate and payment amount change. If
you apply for a variable rate loan, also known as an adjustable rate mortgage
("ARM"), a disclosure and booklet required by the Truth in Lending Act will
further describe the ARM. Most loans can be repaid over a term of 30 years or
less. Most loans have equal monthly payments. The amounts can change from time
to time on an ARM depending on changes in the interest rate. Some loans have
short terms and a large final payment called a "balloon." You should shop for
the type of home mortgage loan terms that best suit your needs.
Interest Rate, "Points" & Other Fees. Often the price of a home mortgage loan is
stated in terms of an interest rate, points, and other fees. A "point" is a fee
that equals 1 percent of the loan amount. Points are usually paid to the lender,
mortgage broker, or both, at the settlement or upon the completion of the
escrow. Often, you can pay fewer points in exchange for a higher interest rate
or more points for a lower rate. Ask your lender or mortgage broker about points
and other fees.
A document called the Truth in Lending Disclosure Statement will show you the
"Annual Percentage Rate" ("APR") and other payment information for the loan you
have applied for. The APR takes into account not only the interest rate, but
also the points, mortgage broker fees and certain other fees that you have to
pay. Ask for the APR before you apply to help you shop for the loan that is best
for you. Also ask if your loan will have a charge or a fee for paying all or
part of the loan before payment is due ("prepayment penalty"). You may be able
to negotiate the terms of the prepayment penalty.
Lender-Required Settlement Costs. Your lender may require you to obtain certain
settlement services, such as a new survey, mortgage insurance or title
insurance. It may also order and charge you for other settlement-related
services, such as the appraisal or credit report. A lender may also charge other
fees, such as fees for loan processing, document preparation, underwriting,
flood certification or an application fee. You may wish to ask for an estimate
of fees and settlement costs before choosing a lender. Some lenders offer
cost" or "no point" loans but normally cover these fees or costs by charging a
higher interest rate.
Comparing Loan Costs. Comparing APRs may be an effective way to shop for a loan. However, you must compare similar loan products for the same loan amount. For
example, compare two 30-year fixed rate loans for $100,000. Loan A with an APR
of 8.35% is less costly than Loan B with an APR of 8.65% over the loan term. However, before you decide on a loan, you should consider the up-front cash you
will be required to pay for each of the two loans as well.
Another effective shopping technique is to compare identical loans with
different up-front points and other fees. For example, if you are offered two
30-year fixed rate loans for $100,000 and at 8%, the monthly payments are the
same, but the up-front costs are different:
Loan A - 2 points ($2,000) and lender required costs of $1800 = $3800 in costs.
Loan B - 2 1/4 points ($2250) and lender required costs of $1200 = $3450 in
A comparison of the up-front costs shows Loan B requires $350 less in up-front
cash than Loan A. However, your individual situation (how long you plan to stay
in your house) and your tax situation (points can usually be deducted for the
tax year that you purchase a house) may affect your choice of loans.
Lock-ins. "Locking in" your rate or points at the time of application or during
the processing of your loan will keep the rate and/or points from changing until
settlement or closing of the escrow process. Ask your lender if there is a fee
to lock-in the rate and whether the fee reduces the amount you have to pay for
points. Find out how long the lock-in is good, what happens if it expires, and
whether the lock-in fee is refundable if your application is rejected.
Tax and Insurance Payments. Your monthly mortgage payment will be used to repay
the money you borrowed plus interest. Part of your monthly payment may be
deposited into an "escrow account" (also known as a "reserve" or
account) so your lender or servicer can pay your real estate taxes, property
insurance, mortgage insurance and/or flood insurance. Ask your lender or
mortgage broker if you will be required to set up an escrow or impound account
for taxes and insurance payments.
Transfer of Your Loan. While you may start the loan process with a lender or
mortgage broker, you could find that after settlement another company may be
collecting the payments on your loan. Collecting loan payments is often known as
"servicing" the loan. Your lender or broker will disclose whether it expects to
service your loan or to transfer the servicing to someone else.
Mortgage Insurance. Private mortgage insurance and government mortgage insurance
protect the lender against default and enable the lender to make a loan which
the lender considers a higher risk. Lenders often require mortgage insurance for
loans where the down payment is less than 20% of the sales price. You may be
billed monthly, annually, by an initial lump sum, or some combination of these
practices for your mortgage insurance premium. Ask your lender if mortgage
insurance is required and how much it will cost. Mortgage insurance should not
be confused with mortgage life, credit life or disability insurance, which are
designed to pay off a mortgage in the event of the borrower's death or
You may also be offered "lender paid" mortgage insurance ("LPMI"). Under LPMI
plans, the lender purchases the mortgage insurance and pays the premiums to the
insurer. The lender will increase your interest rate to pay for the premiums --
but LPMI may reduce your settlement costs. You cannot cancel LPMI or government
mortgage insurance during the life of your loan. However, it may be possible to
cancel private mortgage insurance at some point, such as when your loan balance
is reduced to a certain amount. Before you commit to paying for mortgage
insurance, find out the specific requirements for cancellation.
Flood Hazard Areas. Most lenders will not lend you money to buy a home in a
flood hazard area unless you pay for flood insurance. Some government loan
programs will not allow you to purchase a home that is located in a flood hazard
area. Your lender may charge you a fee to check for flood hazards. You should be
notified if flood insurance is required. If a change in flood insurance maps
brings your home within a flood hazard area after your loan is made, your lender
or servicer may require you to buy flood insurance at that time.