Best Practices, How to Shop for a Mortgage Loan

If you are in a good financial position to purchase a home, now is a decent time to think about taking the plunge.  The interest rates and housing prices are at all time lows.  Before you find your dream home, you need to determine how much you can afford, the amount you will quality for and how much you can afford to pay monthly. This is the largest debt you will incur and you need to research it carefully.

You should shop around for rates and get multiple quotes. The best place to start researching is the internet to determine the interest rates being offered and make comparisons.  Working with a realtor and using their mortgage broker may not always yield the best deal, but you won’t know unless you shop around.  You need to consider how much you are financing, your down payment, interest rate, years, closing costs, and prepayment penalties.  Other items added into your monthly payment can include mortgage insurance, home owner insurance, and real estate taxes.  And, you HAVE to recognize that you’ll be on the hook for the same payment amount for years, decades in most cases.

Here are some things to think about…

Down payment –Some mortgages require a certain percentage of the mortgage amount paid in advance.  The larger the down payment, the more it reduces your mortgage and reduces your payment.

Closing costs – Closing costs are fees charged by those involved in the home sale such as lender, Title Company, recording the deed, etc.  This is typically between 2 and 3 percent.  Some companies won’t charge closing costs but the interest rate is usually higher.  You have to do the math to consider the best deal.

Prepayment penalties – These are penalties for paying off the loan early. You want to be able to pay more toward the principal and pay your loan off early and not be penalized for doing so. This reduces the interest that you pay over the life of the loan.  I’d avoid loans that have a pre-payment penalty.

Interest rate – Interest rates are fixed or variable.  The fixed interest rate does not change over the life of the loan. This helps for planning purposes and does not change based on interest rates. Fixed can be for 10, 15 or 30 years.  The variable rate loan is also called an “adjustable rate mortgage” or ARM.  The interest rate for ARMs changes over time, may be set for a few years for example 3, 5 or 7 years, and then change based upon a financial index such as prime rate. ARMs are usually offered at a lower interest rate than fixed loans,  but over time can be higher. ARMs are more risky because you don’t know what interest rates will do in the future.

Additional items – Other items added into your monthly payment can include mortgage insurance, homeowner insurance, and property taxes. Mortgage insurance is a guarantee for the lender to help reduce loss if the borrower defaults. You need equity of at least 20% to avoid paying mortgage insurance.  If you pay your homeowner insurance and  property taxes directly, this amount won’t be included in your mortgage payment.

Those with the excellent credit, steady employment and assets can qualify for the lowest interest rates.  Even if that isn’t you, you need to find the best deal for your situation.  This is the largest purchase you will make and you need to take the time to find the best deal.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

Categorised in: Credit Report, Credit Score, Getting Credit

This post was written by John Ulzheimer