Research Rates
Begin by checking out current interest rates and rate movements when shopping for a mortgage. Mortgage rates generally rise and fall along with Wall Street securities and generally reflect the overall direction of interest rates. By keeping an eye on mortgage market trends and key economic indicators, a borrower has a better chance of obtaining interest rate savings.
What is APR?
A tool used to compare loans across different lenders is the Annual Percentage Rate (APR). The Federal Truth in Lending law requires mortgage companies to disclose the APR when they advertise a rate. It is designed to represent the true cost of the loan to the borrower, expressed in the form of a yearly rate. The purpose is to prevent lenders from hiding fees and upfront costs behind low advertised interest rates.
The Federal Truth in Lending law requires mortgage companies to disclose the APR when they advertise a rate. It is designed to represent the true cost of the loan to the borrower, expressed in the form of a yearly rate. The purpose is to prevent lenders from hiding fees and upfront costs behind low advertised interest rates.
One confusing aspect of APRs is that the APR on 15 year loans will carry a higher relative rate due to the fact that the points are amortized over the 15 year term rather than the 30 year term. When a Regulation Z (the mortgage company's disclosure of cost for the loan) is prepared for a buyer/borrower, the prepaid interest is also included in the APR calculation.
Even lenders admit it is confusing since it includes some, but not all, of the various fees and insurance premiums that accompany a mortgage. The rules for calculation of this number have not been clearly defined, so APRs vary from lender to lender and from loan to loan, depending on which types of fees and charges are included.
In addition, the APR model is flawed in that when a product is variable and tied to a market index, the index is assumed to never change. This obviously is an invalid assumption that can lead again to a number, which in fact can not be compared, from one quoting source to another.
Finally, the APR won't tell you anything about balloon payments and prepayment penalties or how long your rate is locked for. You can use APRs as a guideline to shop for loans, but you should not depend solely on the APR in choosing which loan is best for your needs.
Meeting with a Lender
You may prefer to meet with the mortgage company before house hunting to determine in advance how much you can afford and the mortgage amount for which you can qualify. This step is called pre-qualification and can save you time and trouble by making certain you are looking in the correct price range.
The loan approval process generally begins with an initial interview where you and the mortgage professional meet to discuss the potential loan. You will need to bring information to verify your income and long term debts.
You may prefer to meet with the mortgage company before house hunting to determine in advance how much you can afford and the mortgage amount for which you can qualify. This step is called pre-qualification and can save you time and trouble by making certain you are looking in the correct price range.
To complete the 1003 Mortgage Application, you will need to gather:
- A purchase contract for the house (if you have one)
- Your bank account numbers and the address of your bank branch, along with checking and savings account statements for the previous 2-3 months
- Pay stubs, W2 withholding forms, tax returns for two years, or other proof of employment and income verification
- Credit card bills for the past few billing periods, or canceled checks for rent or utility bill payments, to show payment history and amount of revolving debt
- Information on other consumer debt such as car loans, furniture loans, student loans and retail credit cards
- Balance sheets and tax returns, if you are self-employed
- Any gift letters, if you are using a gift from a parent or relative or other organization to help pay the down payment and/or closing costs. This letter simply states that the money is in fact a gift and will not have to be repaid.
Having these items on hand when you visit the mortgage company will help speed up the application process. Usually an application fee and the appraisal fee will have to be paid when you submit the mortgage application. After the initial meeting with the mortgage company, you should have a general idea if you qualify for the size and type of loan you want. After the mortgage application, the mortgage company should let you know if you qualify for the loan within days.
Lock in Your Rate
A lock in, also called a rate lock or rate commitment, is a lender's promise to hold a certain interest rate and a certain number of points for you, usually for a specified period of time, while your loan application is processed. Depending upon the lender, you may be able to lock in the interest rate and number of points that you will be charged when you file your application, during processing of the loan, when the loan is approved, or later.
A lock, also called a rate lock or rate commitment, is a lender's promise to hold a certain interest rate and a certain number of points for you, usually for a specified period of time, while your loan application is processed. Depending upon the lender, you may be able to lock in the interest rate and number of points that you will be charged when you file your application, during processing of the loan, when the loan is approved, or later.
Shorter loans, such as a 20 year or 15 year note, can save you thousand of dollars in interest payments over the life of the loan, but your monthly payments will be higher. An adjustable rate mortgage may get you started with a lower interest rate than a fixed rate mortgage, but your payments could get higher when the interest rate changes.
A larger down payment greater than 20% will give you the best possible rate. With a down payment of 5% or less, you should expect to pay a higher rate as you are starting with less equity as collateral. If you've got the cash now and want to lower your payments, you can pay points on your loan to lower your mortgage rate. It's a simple concept, really. In exchange for more money up front, lenders are willing to lower the interest rate they charge, cutting the borrower's payments. Closing costs are fees paid by the lender, if you do not want to pay all of the closing costs, expect a higher rate which will pay the lender additional interest over the life of the loan.
Your credit quality and debt-to-income ratio affect the terms of your loan through your FICO Score. If you have good credit and your monthly income far surpasses your monthly debt obligations, you will get approved at a lower interest rate. However, if your monthly income barely covers your minimum debt obligations, even if you have a good credit report, you will not receive the lowest available interest rate.
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