It seems that everyone sells mortgages these days. But finding the right mortgage with the right rate, in a sea of confusing ads and variable interest rate packages can be confusing and often costly if you don't have the best finance and negotiating skills.
The lowest rate isn't always the best deal
Before signing on the dotted line, there are other factors of the loan that need to be considered, such as points and closing costs. Closing costs are additional fees and expenses necessary in order to finance a property. Such costs typically include "closing fees" and "loan fees." Examples of closing costs include title insurance, title searches, title examinations, filing fees, courier fees and survey charges. Examples of "loan fees" include appraisal fees, underwriting, processing, flood certification, registration, tax review and points.
Points are the additional finance charges tacked on to the beginning of a loan. They can greatly increase the overall cost of the loan. Points can be paid up front or spread out over the life of the loan, making your initial costs lower but increasing the total cost of the loan (in effect, paying interest on interest). You should also be wary of lenders who charge penalties for earlier prepayment of the loan. Such prepayment penalties can hinder your ability to refinance the property should interest rates fall at a later date.
What's in a mortgage?
There are several types of mortgages available in today's highly competitive mortgage market, so take your time and review your options carefully.
- Fixed-rate mortgage - Exactly as it sounds, the fixed rate remains secured at a pre-determined percentage for the life of the loan. The term usually runs anywhere from 15 to 20 years and most commonly 30-year terms. These are particularly good if you're not planning to move from the home in a short term.
- Adjustable-rate mortgage (ARM) - These rates are highly attractive for new home buyers looking to purchase a home in a high priced market or for a short term purpose because the rate is less than a fixed rate mortgage, thereby resulting in a lower monthly payment. However, borrowers should be aware that interest rates for an ARM change with market rates and economic trends and can rise and fall dramatically in a short amount of time.
- Balloon mortgage - Balloon mortgages offer initial interest rates at very low percentages for the first few years of the loan. At the end of the first five to seven years, you must then make one "balloon" payment that pays off the remaining loan in full.
- Reverse mortgage - With the baby boomer generation quickly growing as the fastest and largest percentage of the U.S. population, the reverse mortgage is gaining in popularity. The rules for a reverse mortgage state that you must be over age 62 and you must live in the home for which you are requesting the mortgage. Beware that while this might be a good option for retirees, the interest rates are usually quite high.
- Interest Only mortgage - As the newest player on the mortgage field, the interest only loan allows the borrower to receive a substantially lower interest rate for the first five, 10 or even 15 years of the loan, thereby lowering the monthly payment of the loan. If you're an extremely disciplined investor that will take the monthly savings and route it directly to an investment or savings account, this may be a great option. Just know that this type of strategy will result in loan payment that will nearly double after the initial low interest period has passed.
Look into bi-week payment options
Once you've decided on a mortgage type be sure to check into prepayment options. Normally, your mortgage is due once per month so you will make 12 payments per year. With a bi-monthly mortgage option, you make payments every two weeks, paying half the monthly fee in each payment. How can that save you money? If you take a second look at this option, you'll quickly realize that by making bi-monthly payments that you're actually paying half of your monthly mortgage payment two weeks early, saving you interest on that half for two weeks. The difference over the life of a 30-year mortgage can be considerable. Now let's look at the two bi-monthly payments, or 26 half payments, which equals 13 whole payments per year. That translates to one additional mortgage payment each year. With the extra payments going directly toward principle, you're paying down the loan even faster and reducing the amount of interest you're charged on the loan.
Next, it's time to go rate shopping. Remember that the rates and costs can vary from lender to lender. Try to shop for rates in a one day period so you'll receive comparable rates and thoroughly question the lender about various fees. Be careful how many formal mortgage qualification requests you make, as each request may result in a credit check. Too many credit checks can reduce your overall credit rating. Each lender will have differing interest rates and programs, so if one doesn't have the mortgage that's right for you, the next one might.
This article submitted by Fiducial. To learn more about mortgage programs and to find competitive interest rates, contact your Fiducial representative by calling 866-FIDUCIAL or visit www.fiducial.com.