The Cost of Your Mortgage Loan

Posted by josette on February 14th, 2008 Leave a comment
Buying A Home, Mortgage Info

 

Money Isn’t Everything
When considering lenders, factor in the level of service they will provide throughout the loan process. I’ll be glad to provide a list of lenders who have successfully helped clients in the past. I also suggest that you ask friends and family in the area for their recommendations.
 
The same care and consideration you give to finding the right house should be applied to your search for the right mortgage lender. For most home-buyers a major determining factor in selecting a lender is the cost of the mortgage loan. But how do you determine the cost of a mortgage loan?
 
Shopping for a Mortgage Loan
 
While most buyers concentrate on interest rates, it is best to look at all the costs associated with a mortgage loan. Mortgage loans include the quoted interest rate, points and closing costs.
 
More than Just Interest
 
A number of fees are associated with the mortgage loan, including:   
  • Appraisal - A carefully documented opinion of value by a licensed, professional appraiser.
  • Credit Report - A detailed report of your credit, employment and residence history prepared by a credit bureau.
  • Principal - The amount owed on a mortgage which does not include interest or other fees.
  • Document Fees, Loan Fees and Processing Fees - Miscellaneous fees charged by the lender.
  • Discount Points - Points paid in addition to the loan origination fee to get a lower interest rate. (1 point = 1 percent of loan amount)
  • Origination Points - the total number of points paid by the borrower at closing. (1 point = 1 percent of loan amount)
  • Interest Rate - A percentage of a loan or mortgage value that is paid to the lender as compensation for loaning funds.
Prepayment Penalty Mortgages (PPMs)
These loans restrict your right to prepay part or all of the principal in the loans early years. A prepayment fee is charged by the lender to the borrower who wishes to pay part or all of the loan ahead of the regular schedule. The advantage of a PPM is that they often have a lower interest rate than other mortgages.
 
Using the Annual Percentage Rate (APR) to Compare Mortgage Loans
 
The APR was designed to help borrowers understand the relative costs of a mortgage loan. The APR takes into account the various fees associated with the loan, which is why it is often higher than the interest rate. Understand that not all lenders calculate a loan’s APR in the same way. That is why this should be only one of the factors used in selecting the best mortgage for you.
 
Locking-in Interest Rates
 
Another factor to consider when selecting a lender is whether the lender will lock-in the mortgage’s interest rate and points. 
Choices and More Choices…
Gone are the days when the only kind of mortgage available was a 30-year fixed-rate loan. Today, there are a wide variety of mortgage programs to choose from. One of the first choices you’ll face when picking a mortgage program is between a fixed-rate and an adjustable-rate mortgage. Both have their own unique advantages and disadvantages.  As the name implies, with a fixed-rate mortgage, the interest rate remains fixed for the life of the loan.
 
Some advantages of a fixed-rate mortgage:
  • Offers predictable monthly payments for the duration of the loan
  • Provides protection from rising interest rates. No matter how much market rates increase, your interest rate remains fixed.
Some disadvantages to this type of mortgage are:
  • It may be more difficult to qualify for a given loan amount, since the interest rate is higher.
  • If interest rates drop significantly, you will need to refinance to take advantage of the new, lower rates.
  • Fixed-rate loans are generally a good choice for borrowers who plan to stay in their homes for a long period of time or have a lower tolerance for financial risk.
On the other hand, if you plan to stay in your home for a shorter period of time or believe interest rates will go down in the future, an adjustable-rate mortgage, with its lower start rate, may make better financial sense. With an adjustable-rate mortgage, or ‘ARM’, the interest rate fluctuates with changes in market conditions. Many adjustable-rate mortgages have interest-rate ‘caps’ that limit how much the interest rate can change within a particular period.
 
Some advantages of an adjustable-rate mortgage:
  • The initial, or introductory, rates for adjustable-rate mortgages are generally lower than those for fixed-rate mortgages.
  • Some ARM’s offer one of the major advantages of a fixed-rate mortgage, by allowing you to lock in the low, introductory rate for several years before any adjustment takes place. For example, some lenders offer 10-year ARM’s, which have a lower start rate than a 30-year fixed-rate mortgage, but which do not adjust until the 11th year.
  • Because of the lower start rate, borrowers may qualify for a larger loan amount, and therefore, a more expensive home, than with a fixed-rate mortgage.
Some disadvantages to an adjustable-rate mortgage are:
  • Although most ARM’s have interest rate caps that will protect you from sudden increases in your interest rate, if market rates go up, your payment will likely go up also.
  • If your interest rate - and payment - increase enough, your home could be unaffordable.
  • Adjustable-rate mortgages are often a good choice for borrowers who think they may want to sell or refinance early, expect their earnings to increase in the future, or are looking to purchase a home when interest rates are relatively high.
Jumbo loans. Jumbo loans are loans which exceed a specific loan amount, known as the "conforming loan limit". Currently, loans over $417,000 for a single-family home, are considered jumbo loans. Jumbo loans typically require larger down payments, and have somewhat higher rates than "conforming", or non-jumbo, loans. (this will change soon as the stimulus package goes through and our metro aea loan amounts are raised)
 
Alternative financing. Special mortgage programs exist for borrowers with less-than-perfect credit, or for whom documenting their income may be particularly difficult or burdensome. For example, so-called "no documentation" loans may permit borrowers who are self-employed or who work on commission to qualify for a loan based solely on their credit history and stated income.
Although the breadth of mortgage options may appear daunting, a good loan officer can help you sort through the options and select the mortgage program best suited for your particular situation.

 

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