Shopping for a Mortgage

shopping for a Destin mortgageAccording to the non-profit organization
THE FANNIE MAE FOUNDATION, these questions should help you make the best decision when searching for a home mortgage:

1. Company Name and Phone Number: Write down the name of the loan officer with whom you speak, so you can get back in touch if you decide to apply for a loan at that financial institution.

2. Mortgage Type: Your task will be simpler if you’ve narrowed your search to the type of mortgage loan you prefer. When comparing mortgages among lenders, compare the same loan among the lenders you call…In other words, compare a 30-year fixed rate to a 30-year fixed rate, a one-year Treasury ARM to a one-year Treasury ARM, etc.

3. Interest Rate and Points: Interest rates change often, even daily. Make sure you record the date of your rate quote. Try to call all lenders on the same day so you have an accurate comparison. Another way to evaluate rates is by examining the Annual Percentage Rate (APR). It indicates the “effective rate of interest paid” per year. The figure includes points and other closing costs and spreads them over the life of the loan. While the APR provides you with a common point for comparison, it’s important to look at the whole product before deciding which mortgage to get.

4. Interest Rate Lock-ins: When a lender agrees to hold the quoted rate for you, this is called a “lock-in.” Ask when can the rate be locked in, at the time of application or only upon approval? Will the lender lock in both the interest rate and points? Can you get a written lock-in agreement? How long does the lock-in remain in effect? Is there a charge for locking in a rate? If the rate drops before closing, must you close at your locked in rate or can you get the lower rate?

5. Minimum Down Payment Required: Ask the loan officer what the lowest allowable down payment is, with and without private mortgage insurance. If Private Mortgage Insurance (PMI) is required, ask how much it will cost. Find out how much is due up front at closing and the amount included as monthly premiums. Ask if you can finance the up-front cost of mortgage insurance. Also ask how long MI will be required. In some cases, you may be able to cancel the MI when your loan balance drops below 80 percent of the original value of the property or when a new appraisal establishes that your mortgage is 80 percent or less of the new appraised value.

6. Prepayment of Principal: Some lenders charge borrowers a prepayment penalty if they pay the loan off early. If you think you may sell your home before the loan is paid off (most mortgages are repaid early) or plan to make principal payments before they are actually due, you need to know if there will be a penalty and for how long it will remain in effect. Some penalties are in effect only for the early years of the loan.

7. Loan Processing Time: Loan approvals can take 30 to 60 days or more. Peak business periods, particularly when rates are dropping and many homeowners are refinancing, can affect a lender’s response time. Ask each lending institution for its estimate, and see which can promise very short approval times. If interest rates are rising or you have an urgent need to get moved in, these “express” services may be the answer.

8. Closing Costs: Closing costs are fees required by the lender at closing and can vary considerably from one financial institution to another. Ask specifically about the application fee, origination fee, points, credit report fee, appraisal fee, survey fee (if required), lender’s attorney fee, cost of title search and title insurance, transfer taxes, and document preparation fee.


If you’re shopping for an adjustable-rate mortgage (ARM),
ask the additional questions that follow:


9. Financial Index and Margin: The interest rate on an ARM is determined by adding a margin or spread to a specified financial index. This is called the fully indexed rate. Find out both the financial index used (Treasury Certificate of Deposit, Cost of Funds, etc.) and the margin (that is, how much higher is the ARM rate than the index rate?).

10. Initial Interest Rate: Is the initial rate quoted the fully indexed rate or a lower introductory rate, sometimes called a teaser or discount rate? A teaser rate may sound like a bargain today but it may turn out to cost you more in the long run. This low rate lasts only until the first adjustment. After that, you will be charged the fully indexed rate, at which point your payments may become unmanageable.

11. Adjustment Interval: How often can the interest rate be adjusted – every six months, one year, three years, five years? A loan that adjusts its interest rate after six months is called a six-month ARM; after one year; a one-year ARM; etc.

12. Rate Caps: Rate caps limit how much your interest rate can move, either up or down. Periodic caps limit the change per adjustment period, and a lifetime cap governs the maximum amount the interest rate can increase or decrease over the life of the loan. For example, you may find a one-year ARM with a 2 percent periodic cap and a 6 percent lifetime cap. If this one-year ARM is originated at 8 percent, after the one-year adjustment period it could be adjusted upward to as much as 10 percent, or downward to as low as 6 percent, depending on the movement of the index. Remember to consider the adjustment interval when comparing rate caps. The one-year ARM just described could reach its lifetime cap of 14 percent (original interest rate of 8 percent plus lifetime interest rate increase of 6 percent) in three years if interest rates rose steadily. A three-year ARM would just be making its first adjustment after such a three-year period.

13. Payment Caps: Payment caps may appear similar to rate caps, but don’t be misled. While they can limit how much your monthly payment increases, they don’t restrict the interest rate from going up. Many ARMs with payment caps have no corresponding interest rate caps. As a result, you may end up paying the lender less than the amount of interest you owe each month. If this happens, this unpaid interest is added to your loan balance, and the principal amount you owe increases rather than decreases with each payment. This is called negative amortization and generally should be avoided.

14. Conversion to Fixed-Rate Loan: Some ARMs let you convert to a fixed rate mortgage at specified times, typically during the first five years of the loan. Because the convertibility feature is often an added expense (some lenders charge an extra point, for example), find out the exact conversion terms and how much it would cost you to convert your ARM to a fixed rate loan. You’ll want to compare this cost with the costs incurred and the interest rate savings you might gain by refinancing your mortgage to a fixed-rate loan. This will help you decide the relative advantages of each option to determine which is most cost effective for you.