When you're in the market for a home, I'm here to help you find the best mortgage terms around. But I also want you to be a fully-informed consumer!
As you already know, buying a home may be the largest purchase of your life so you should go into it with eyes wide open!
In this article, I'd like to provide you some proven and common-sense guidelines that can save you time, money and hassle during the mortgage-hunting process.
Guideline 1: Look Beneath the Surface of the Interest Rate!
If you're like most prospective home buyers, you call lenders or use the Internet to shop for the best interest rates. That's a good first step, no doubt about it!
But, the mistake many buyers make is that they stop there and don't consider the fees that may be added on to the loan later by the cheapest lender.
In other words, it's the lenders' game, and they may want you to play by the rules you're not even aware of. The answer, of course, is to know those rules ahead of time so you know exactly what you're getting when you buy that mortgage. More on this subject later!
Guideline 2: Chose the Type of Lender That Works Best for You!
There are several different sources of lenders - banks, credit unions, mortgage brokers, etc.
They all have their advantages and disadvantages in terms of the rates and services they can offer you. For example, credit unions often provide the best value and service, but, of course, you have to belong to one in order to receive their services.
Regular banks and "big lenders" (Bank of America, Citigroup, etc.) also provide competitive rates and services. Of course, they only offer products their companies provide.
You can also use a mortgage broker. This person is a "wholesaler" who uses several lenders to give service to their customers.
The advantage of a broker is that he or she offers a greater selection of rates and products. However, they also tend to be more expensive than regular banks and big lenders.
Brokers make money in two ways. One is origination fees ("yield spread" or "rebate"). Essentially, the origination fee is a commission paid by the bank to the brokers to encourage them to use their firm. The second way is by selling a higher interest rate to you. This means there's room for you to negotiate that interest rate down!
When a broker quotes you an interest rate, ask him or her to tell you what the origination fee, rebate or yield spread on that rate is.
For a broker, a reasonable amount would be a total of 1% of the loan amount from yield spread, origination or combination of the two. Most brokers usually want to make at least 2%.
Tip: Don't pay an origination fee unless the broker informs you that he or she isn't getting anything on the back end of the deal.
The bottom line: you can (and should) shop among all these lenders to find the lowest rate. It can save you thousands of dollars over the life of the mortgage.
Guideline 3: Review the Good Faith Estimate with an Eagle Eye!
The document should cover closing costs and the amount of cash you need to close on the agreement. It should also spell out which if any prepaid expenses must be handled and the average monthly payment you'll have to make in order to keep up with the loan.
Most lenders provide complete and straight-forward information on these forms; however, there's no reason for you to accept the GFE at face value.
Comb through the information and if you don't understand a particular item or fee, ask for an explanation. If you still don't understand them, you may want a lawyer to review them for you so you have complete understanding.
Remember: A GFE is only an estimate. Changes may occur through no fault of the lender. A reputable lender will let you know if fees are going up substantially. In general, however, if those fees go up by more than approximately 16%, then a red flag should go up in your mind.
Guideline 4: Negotiate, Negotiate, Negotiate!
When confronted with the expertise and "prestige" of banks, we all have a tendency to think they know best, and we should, therefore, agree to their terms. Never think this way! Banks are like any business; you can and should negotiate with them!
Want more information on banks and other lenders? Contact me at sclark@deebrealesate.com or call 402.305.4335.
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