HomeGain: Find & Compare REALTORS®

Home Organize Your Files How to Buy a New Home How to Buy Used Homes How to Finance a Home Home Equity Loans Homeowners Insurance How To Choose An Agent How to Sell Your Home Glossary Click here to learn about Home Building Pitfalls

All About Mortgages, Home Loans & Avoiding Scams In This Section: This useful guide puts home finance in perspective with tips on home mortgages, getting the most out of your mortgage company, tips on where to find the lowest mortgage rates and reviews of top online mortgage sites like Quicken Loans and mortgage calculators. You'll also find scams and loan fees to avoid, dealing with mortgage brokers, and tips to increase your approval chances for a home mortgage loan or a second mortgage. We'll arm you with the tools you need for your home loan.  We also suggest you read these other 3 chapters: Organize Your Files Before Applying For A Mortgage Our other site DebtWizards.com has great tips on repairing your credit. Credit Repair Tips HouseBuyingTips.com Buyers Warning Some lenders or mortgage brokers will tell you the advantages of whatever mortgage they are trying to squeeze you into, but rarely will they tell you the disadvantages. Be ready when it happens and things will go your way. There are many details that you will need to know about a mortgage to avoid being a victim. The annual percentage rate (APR) of a mortgage is the interest rate including the cost of points and other fees. These other fees include things like private mortgage insurance (PMI). PMI is insurance that you are forced to take out by the bank if you are putting down less than a certain percentage (usually 20%) of the total purchase price. This insurance protects the bank from losses in case you stop making your payments. The bank must drop the PMI once you have built up more than 22% in equity. Stay on top of this and make sure they drop it when they are supposed to. If your property appreciates you effectively have more equity in your home. If this happens you should ask your lender if they will drop the PMI requirement based on the new value. In order for them to drop the PMI they will most likely require an appraisal which will cost you around $250.

Mortgage Brokers
Mortgage brokers are companies that sell mortgages for many different banks and lenders. They usually get a commission based on a flat fee or a percentage of the loan, paid by the lender. Brokers can be useful in quickly getting you a loan, because they represent many different types of mortgages, and one of them is bound to be ideal for your financial situation. Sometimes, the APR through brokers can be less expensive than going directly to the same bank yourself for financing, because in many cases the broker charges less for closing a loan than the bank's own internal salespeople.

Some great examples of online sites that are like a mortgage broker is Quicken Loans. What makes these sites so great is that they locate up to 4 banks that match your financial situation who are willing to write you a mortgage. It's a great way to get pre-approved without the credit check. They have a large database of lenders to ensure that most people will get an offer.

Pros:

• You can get cheaper APR mortgages.
• Sliding lock. If you lock in your APR through the broker, and the market interest rates drop, some brokers can get out of the lock and restart another lock for little or no extra fees. Many banks will not allow that type of practice when dealing directly with them. Some banks will allow you to re-lock, some will not, and some will charge a fee.
• Can quickly find a loan that you would qualify for, whereas a bank might only have one or 2 loan types that you would not qualify for.

Cons:

• They must courier papers back and forth to lenders, so postage charges can add up. It can be $200 in postage fees from one broker before your loan closes.
• Many unscrupulous brokers out there who can steer you into the wrong mortgage. Just because you qualify quickly for a particular mortgage, does not mean it's the best mortgage for you to have. Some try to charge you fees, or put you into mortgages that don't allow early termination, or they have excessively high origination fees. These are issues you need to watch out for.

Where To Apply For Mortgages Online

If you are thinking about applying for any type of home-equity debt, you should first read our chapter Organize Your Files Before Applying ForA Mortgage. It explains everything that you need to do before you apply for home-equity debt including checking your credit report and getting your credit score.

Since your mortgage payment will most likely be your largest monthly expense for a LONG time, make sure to shop around and get the best deal possible. Below is a list of reputable online sites where you can apply for a mortgage. You should fill out the free application from each one and compare to see which gives you the best deal. Maybe your local bank will have the best deal but you'll never know that a better deal was out there if you don't shop around. Make sure that you get your credit report before applying for a mortgage, so that you can resolve any problems you find and increase your likelihood of getting approved. Equifax now offers a credit report that includes your real Fair Issacs credit score which used to be hidden from you. This score will really let you know how good (or bad) your credit is. If your score is not as good as you had hoped, it is probably a good idea to get a merged credit report which has information reported by all 3 credit bureaus.

Don't be afraid about applying for a mortgage online. Information transferred to secure sites is extremely safe and can not easily be intercepted by anybody so you should not be worried about information security. You will find descriptions of some of the major online mortgage sites below. Remember to get more than one quote so that you get the best deal and save the most money.

Mortgage Types
There are many, many different types of mortgages. We will cover the some of the most common types on this page.

In this part of the page we will cover the two most common types of mortgages - fixed rate and adjustable rate (ARM).

Fixed Rate Mortgage
With a fixed rate mortgage your interest rate is set prior to closing on your home and does not change for the entire term of the loan. If you are approved far in advance of closing many banks will give you the opportunity to lock in the interest rate 2 - 3 months prior to closing. Sometimes you may be able to lock further in advance for a fee, which is usually some percentage of a point. A point is equal to 1% of the loan amount. Locking early for a fee may be advantageous if rates are low and expected to rise.

Pros Of Fixed Rate Mortgages:

• You know what your monthly payment amount will be and it will not change.
• No worries about interest rate hikes that will raise your payments.

Cons Of Fixed Rate Mortgages:

• Initial interest rate is higher than an adjustable rate mortgage.
• If interest rates decline, it will not lower your payments.
• If the interest rates decline significantly, you can refinance your mortgage to take advantage of the lower interest rate. Refinance charges will be incurred, so the interest rate drop must be able to justify these costs.

You can get online quotes for fixed rate mortgages at Quicken Loans. Remember that a mortgage is an expense that will be with you for a long time. See which one will give you the best deal. A few dollars a month will really add up over 15 or 30 years.

Adjustable Rate Mortgage or ARM
With an Adjustable Rate Mortgage the interest rate will vary throughout the term of the loan. How often the rate change depends upon the adjustment period of the loan.

Pros Of Adjustable Rate Mortgages

• Adjustable Rate Mortgagesare initially priced at a lower mortgage rate than fixed interest rate mortgages. This will result in a lower initial payment.
• The bank is willing to give a lower mortgage interest rate because it is "protected" from higher interest rates in the future.
• Adjustable rate mortgages generally have a rate increase cap (a cap is a maximum) per year and a lifetime cap on the interest rate. These are important details in an adjustable rate mortgage. It may be better to use an ARM when rates are up high, and they are less advantageous when rates are low.
• If you plan to be in a house for only 3-5 years, an ARM allows you to pay lower monthly payments for those 3-5 years than a fixed interest rate mortgage.
• If interest rates drop, an ARM provides a way to participate in these lower rates without having to refinance your house. This can save you closing costs.
• The adjustment period is key to the loan. How often they adjust the payment is important because you want the longest adjustable period. Most decent ARMs have an adjustment period of one year, so your monthly payments remain the same for a year, then increase or decrease the next year.

Cons Of Adjustable Rate Mortgages

• Interest rate hikes will increase the amount of your payments.
• Since it is difficult to predict interest rates changes, it may be difficult to plan a adjustable rate mortgage payment into your budget.
• If you have a cap over 2%, your monthly payments can go up significantly. Try to get the lowest cap you can.
• Catch up clauses can come out of nowhere. If the cap was 3% and the rates rose 5%, they can invoke a "catch up" clause the following year, which can significantly increase your monthly payments.
• Any time interest rates are adjustable, there is risk of volatility and increased monthly payments from the mortgage lenders.
• Avoid adjustable rate mortgages with negative amortization!
• Be very weary of the word "discount" when looking at ARMs as this means that the loan will most likely have a shorter adjustment period which will lead to a higher cost in the long run. This is similar to introductory rates on a credit card.
• BE ASSURED THE RATES WILL RISE SHARPLY SOONER RATHER THAN LATER!!!

Just like fixed rate mortgages you should shop around for the best deal if you are interested in an adjustable rate mortgage. You should get quotes from as many online sites like Quicken Loans as possible. When you compare the quotes make sure to pay close attention to the caps and other details that are unique to adjustable rate mortgages.

Other mortgage payment items:

Personal Mortgage Insurance (PMI)
20% down/equity and you don't have to pay this worthless expense! PMI is insurance that you are forced to take out by the bank if you are putting down less than a certain percentage (usually 20%) of the total purchase price. This insurance protects the bank from losses in case you stop making your payments. The bank must drop the PMI once you have built up more than 22% in equity. Stay on top of this and make sure they drop it when they are supposed to. If your property appreciates you effectively have more equity in your home. If this happens you should ask your lender if they will drop the PMI requirement based on the new value. In order for them to drop the PMI they will most likely require an appraisal which will cost you around $250.

Tax Escrow
20% down/equity and you can pay your own taxes. This means that if you put down at least 20% or have built up 20% in equity the bank will usually let you hold the tax money in an interest bearing account until the taxes are due!

Insurance (Homeowners and Flood)
Most banks require you to keep homeowners insurance and flood insurance in escrow to protect their investment. This way they always know that you have the insurance to protect the property that they are lending you money on. A good place to get online insurance quotes is net Quote.

Jumbo Loans
Loans that are in excess of an amount set by the Federal National Mortgage Association. This amount is presently set at $252,700 for a single-family home, or $323,400 for a two-family home in the continental US, in Hawaii and Alaska, the amount is $379,050 for a single-family home or $485,100 for a two-family home. Most commercial lenders agree to use these guidelines, which are set by the Federal National Mortgage Association (Fannie Mae). Jumbo loans have higher interest rates and fewer financing options, and are also called non-conforming loans.

Some other definitions

Mortgage Term
The "term" or length to the mortgage is an important factor that must be considered when looking for a mortgage. Mortgages are generally 15, 20 and 30 years. Generally the shorter the term of the mortgage, the lower the interest rate will be. This is because the bank has less exposure to interest rate increases in the future. The shorter the term, the less chance of interest increases. The shorter terms mortgages will save you a large amount of money in interest payments. If you can not afford a shorter term mortgage, a large amount of interest and monthly payments can be saved by making extra payments towards the loan principle.

Points on a Mortgage
The more points (a point is equal to 1% of the mortgage amount) you are willing to pay, the lower the interest rate on the mortgage will be. So a basic decision needs to be made here, pay the points ($$$$) up front and save on the interest on the mortgage later, or save the money now and pay the higher interest rate as you go.

Below is an example of two mortgages. The first mortgage is a no points mortgage and the second mortgage has points paid up front. Note: in some cases the points can be "put back into" the mortgage, thus increasing the amount of the mortgage by the mount of the points paid on the mortgage.

* Monthly Payment includes Principle and Interest.

In the example above, the payment of 2 points, equivalent to $3,000.00 on the $150,000.00 mortgage lowered the monthly payment by $25.05 and saved a total of $9,025.58 in interest over the life of the mortgage.

On the third row in the table the $3,000.00 in points were put back into the mortgage, increasing the mortgage amount $150,000.00 to $153,000.00 The monthly payments decrease from $997.95 to $992.36 a savings of $5.59, while the interest over the life of the loan went down from $209,266.34 to $204,243.90 a savings of $5,022.34 in this case.

Bottom Line:  Look Beyond The APR
Don't just look at the APR of a mortgage loan. The example above clearly shows how important it is to take into account the points on a home mortgage loan. Depending on your situation, it can be better for you to pay points in order to get a lower APR.

How do you make the decision?

How long do you plan on staying in the house?
If you plan on staying in the house only a short period of time, the lower initial cost of less points or even no points would be the way to go. However, if you are planning to stay in the house for a longer period of time, a large amount of money can be saved by paying the points up front and saving on lower interest later.

Do you have the money to pay for the higher amount of points?
If you plan on staying in the house a long period of time, and you have the money to pay the points up front, it may be a good idea to pay the point(s) and save the interest. This can be a considerable amount of money over the life of the loan.

Does the point fee lower the APR enough?
If you plan on staying in the house a long period time and have the money to pay the points up front, the next question to ask is, Does paying the points to get a lower interest rate, lower the interest rate enough? This depends on how long you will stay in the house and how much a point will lower the interest rate. Generally a point will lower your interest rate by about 1/8 - 1/4 of a percent on a 30 year fixed rate mortgage and 1/4 - 1/2 a percent on a 15 year fix rate mortgage.

Points can be put back into the mortgage.
You may be able to "put the points into the mortgage". This means that the dollar amount of the points are added into the mortgage amount. One point on a $100,000.00 is equal to $1,000.00 So if you were getting a $100,000.00 mortgage with a 1 point fee put back into the mortgage, the new mortgage amount would be $101,000.00.

Quicken Loans will give you up to 4 mortgage quotes free when you fill out their easy online application. Always check the numbers on the various offers that they come back with. Carefully review these numbers to determine which combination of points and interest rate best satisfies your needs.

Mortgage Calculator