Hooray for the homebuyer who understands the importance of lining up financing before ever stepping foot into a house for sale or placing eyes on a real estate listing website. This is critical to a smooth process.
It’s one thing to understand the steps to take in the home buying process and yet another to understand the whole “how does the loan stuff work?” question and of course – “how much money do I need?”
Because it seems like such a mysterious process, most first-timers look for the lender with the lowest interest rate, sign on the dotted line and call it a day.
That is a huge mistake, and here’s why: there’s more to a loan than the interest rate and not all loan products are identical, so it takes some serious comparison shopping to make sure you’re getting the best deal out there.
Really, it starts with what your goals are in buying a home and understanding what it will take to get you there. Some buyers simply start with how much monthly payment they would like to pay without considering all options. Here’s a quick overview of the money you will need to help you understand and define the differences in the total CASH TO CLOSE on a home. I call these the 3 Buckets of Money. Keep in mind, this is not a comprehensive list. It’s simply to help give you an overview. Also,things like Earnest Money and a few other items can be credited back at close, which is why they are listed in two places. For instance, the upfront Earnest Money will be deposited when you finalize a contract on a home, and you will receive credit for that amount at closing. Meaning it’s that much less you need to bring in ‘closing costs’.
“Understand The Money When Buying A Home”
Here’s a quick comparison of the three most important parts of a mortgage loan – those for which the borrower has to pay.
Find some lenders to compare
Your best source for contact information for at least one lender is…well… ME, your real estate agent. I work closely every day with my Mortgage Partners and I have worked with a handful who don’t get to closing on time, or have failed to communicate clearly or even worse. Many times your ‘online only’ mortgage sites will give you a promise of low interest without considering all the factors so later when the program changes – so does that low “door buster” interest rate.
The first thing you need to understand is that advertised rates don’t necessarily apply to the product you want to purchase.
For instance – you may see an outstanding LOW interest rate advertised and when you look closely, you’ll see that those low rates are for a 20-year term.
These rates, by the way aren’t the whole ball of wax when it comes to understanding how much your loan will cost. It’s the annual percentage rate, or APR, that you want to use when comparing rates.
The APR reflects the interest rate plus fees. Meaning, the APR shows which loan is less expensive over the entire term of the loan.
Know how much you will have – that you’ll be putting down in cash for the home. Then, determine what kind of a mortgage rate you want: fixed rate or adjustable.
Finally, decide on a term for the loan: 30 years, 15 years, five years, etc. You may eventually change your mind on the last consideration after shopping around, but that’s ok.
Now, pick up the phone and make some calls. Ask the following questions:
- Request the lender’s current interest rates and find out whether these rates are the lowest for just that day or for the week and if the rates quoted are for adjustable or fixed mortgages.
- If you’re inquiring about adjustable rates, ask when the rate increases, how the payments vary and whether the payments will go down with a reduction in the interest rate.
- Ask for the loan’s annual percentage rate (APR) and use that to compare the cost of each loan you’re comparing.
These are fees paid to the lender at closing in exchange for a reduced interest rate. One point equals one percent of the loan amount. Sometimes, this is well worth spending your cash on and sometimes, depending on your finances and your GOALS it is not. Just another reason to partner with a trusted mortgage adviser who will listen to your goals and guide you through options.
Ask the lender’s representative to translate the points quoted into a dollar amount. This makes it easier to determine exactly how much you’ll be paying for the loan and, thus, easier to compare it to other offers.
Costs of the loan listed vaguely as “fees” need to be itemized for you to compare one lender to another. Otherwise you are not comparing apples to apples. Be sure to ask for their fees to be listed out in writing. Which brings us to the form…
The Loan Estimate Form
Legally, the lender must provide you, within three days of applying for the loan, a Loan Estimate Form, detailing of all fees that will be due at closing.
This form is what you will use to compare lenders. If you notice any large discrepancies between lenders, call them and ask for clarification. This could be an indication of big differences you need to know about.
When you’ve chosen a lender, you will want to lock in the interest rate, especially if the Feds seem on the verge of raising them. There may be a cost involved, so find out what that is. Your lender can advise you when it’s time to ‘LOCK YOUR RATE’.
To pay less on your monthly house payment requires that you take this initial step – even before choosing the house you’ll eventually purchase.