So, you are looking at becoming a homeowner? Besides the excitement surrounding buying a home, this will be the largest purchase you ever make. As with any large purchase, patience and understanding should play a vital role in your decision. Unless you are paying cash, you will be required to obtain a home mortgage. With so many options, it can be stressful to understand all the aspects of applying for a mortgage. Stepping back and making sure you are getting and paying what you want is the most important aspect of buying a home.
Shop the Rate
You might be tempted to drive down to your local bank and ask for their mortgage consultant. This seems to be a standard practice, but it should just be the start when applying for a mortgage. Mortgage rates differ wildly from bank to bank, which is why it is extremely important to shop around different lenders.
Small interest rate differences might not look like much, but when you break down the monthly payments, you can see the difference. For example, if you obtain a $250,000 mortgage at a rate of 4.5% for 30 years, you can expect to pay $1,013 per month. This does not include any taxes or insurance. If you could get an interest rate of 4.15% for the same loan amount, then you would pay $972 per month Just the 0.35 percentage points change could result in $492 back in your pocket annually.
You should focus on shopping with at least three different mortgage providers before you make a decision. See their rates and understand what their process for obtaining a mortgage entails. Each lender will have different rates for you depending on a variety of factors. You can ask them up front how they come up with their rates.
Know Closing Costs and Fees
Closing costs are the fees associated with purchasing a home and closing on the home loan. Typical fees range from one and five percent of the home purchase price. If you are buying a $200,000 house, then you can expect to pay anywhere from $2,000 to $10,000 to close on your home. Closing costs vary by lender and some even offer no-closing mortgage loans. While these seem great, the borrower pays for it in some manner. Either through a higher interest rate or the closing costs wrapped in the mortgage, the lender will be paid for the closing in some manner.
Closing costs typically involve the following fees:
– Pulling a credit report (average $15 – $50)
– Home appraisal (average $300 – $400)
– Home inspection (average $300 – $500, varies greatly by region & services offered)
– Pest Inspection (average $50 – $75)
– Loan origination (highly negotiable, but averages at 1% of loan amount)
– Attorney’s fees ( variable, average $200 – $500)
– Land survey fee (average $200 – $400)
– Title Insurance (this only protects the lender, but you can request a policy to protect yourself for a little extra money, averages $150 – $800 for lender and same amount for borrower)
– Title search fee (average $150 – $300)
– County or City recording fee (depends on property location)
– Escrow deposit or partial taxes and insurance payments
– Underwriting fee (average $250 – $650)
*The above fees are an estimate in cost and may vary by state or lender.
Lenders are required to give you a Good Faith Estimate (GFE) within three days of applying for a loan. Some can give you a run down before you even apply if you ask. While this number can help you budget for the costs associated, they are not set in stone. By shopping around, you can find out which fees the lender will charge and how much.
Mortgages are structured by banks to earn most of their money up front. When you make your monthly payment, most of your money goes toward interest. This is how the bank earns their money. When a borrower pays off a mortgage early, the bank loses out on the overall amount they could have collected. Enter the prepayment penalty.
A prepayment penalty is a clause in your loan contract which specifies how your lender will handle it if you pay off your mortgage early, specifically surrounding a penalty. The penalty is usually laid out as a percentage of the outstanding balance or a specified amount of interest.
This penalty is not as popular as it used to be, but it does still exist with some lenders. When going over your loan application, make sure to ask about any prepayment penalty. If one exists, it would be in your best interest to find another lender.
Escrow Account Required?
Escrow is a holding account for your mortgage company to make your homeowners insurance and property tax payments for you. They calculate your yearly costs, then divide that into a monthly payment. Your overall mortgage payment will increase when an escrow account is involved, but your insurance and taxes are handled.
Most lenders require an escrow account if you put less than 20% down on your home. Some lenders will allow you to close your escrow account after a specified time and take on the tax and insurance payments on your own. Each lender’s escrow requirements are different and you should ask them upfront.
If you put 20% or more down, then you have a choice if you want an escrow account. Some lenders will still require an escrow account, while others could increase your interest rate slightly when foregoing an escrow account. If you have intentions of forgoing escrow, make your potential lender aware when you are shopping around.
In the end
Finding the right home can be stressful enough, but don’t overlook these key details when trying to find a loan. Keep in mind how long you think you will be in the home as you do the math. If you plan on selling the house before the end of the loan, closing costs may have a bigger impact on your bottom line than the interest rate. Especially if the rates vary by less than ½ percent.
The easiest way to avoid some of the chaos that comes with finding and buying a home is to get pre-approved and identify your lender before you start shopping. It will allow you to focus on the details and remove a key source of stress in the home buying process. It can also give you a competitive advantage as you potentially compete with other buyers for your dream home.
By Grayson Bell, Staff Writer