Presented by Robert C. Blakely
Shopping for a mortgage can be daunting, even for homeowners who have been through the process before. By being prepared, doing your homework, and asking questions, you can find a suitable mortgage for your circumstances.
Tip #1: Obtain your credit report. It goes without saying that borrowers with the best credit history get the best terms.
To determine your credit score, a tool used to determine your creditworthiness, lenders rely on three reporting agencies: Equifax, Experian, and TransUnion. Before you begin shopping for a mortgage, get your credit report from all three agencies at www.annualcreditreport.com. If you haven’t requested a report within the last 12 months, there is no charge. Correct any errors immediately and take steps to improve your score.
Tip #2: Know how much you can afford. There is a difference between what lenders are willing to lend you and how much you can afford. In their efforts to increase their compensation, real estate agents and mortgage brokers look to get you into the most expensive home and the largest mortgage you can qualify for. But only you can determine how much you can afford.
Review your current spending and obligations and add in closing costs, estimated monthly mortgage, property taxes, insurance, utilities, and maintenance. In addition, consider the following before you make your decision:
- Will you have enough to pay for moving expenses, furnishings, repairs, or remodeling and still have enough money to make regular contributions to your emergency fund?
- How soon will you be able to replenish your savings after the down payment?
- If you were to lose your job, would you have enough money saved to get you through a rough period?
- Would taking on too much debt prevent you from achieving other important financial goals?
- If you purchase a home, how would your lifestyle have to change? How would you feel about that?
After answering these questions, you will have enough information to help decide how much you can afford without compromising your future happiness.
Tip #3: Failing to shop around can cost you thousands of dollars. Get quotes from at least three mortgage brokers or lenders. Just because a mortgage broker is independent doesn’t mean that he or she will offer you the best value available in the marketplace.
When making comparisons between brokers and lenders, be sure that the quote is for the same type of mortgage—that is, for the same amount, down payment, term, and type. This can make it easier to compare rates, fees, points, and insurance costs. And because interest rates can change daily, ask that the interest rate quoted to you is available on a set date. It is also helpful to ask for the loan’s annual percentage rate, as this takes into account additional loan costs such as points, broker fees, and other charges.
Comparing interest rates alone does not give you a fair assessment; you also need to understand overage costs. Overage is the difference between the lowest possible loan price that a lender can afford and the amount you are willing to pay. It can be built into the interest rate, points, or other fees. It is negotiable, so shop around.
Remember that “no-cost” can actually mean “hidden costs.” Virtually every mortgage incurs costs. They can be built into longer prepayment penalties (back-end fees), into commissions from the sale of related products or services, or through the interest earned by rolling closing costs into the loan principal. Study the lender’s good faith estimate (GFE) for a full disclosure of your costs.
Tip #4: Read everything and ask questions. A mortgage is a financial commitment you will have to deal with for a long time. It is always wise to have your own real estate attorney review any contracts you are asked to sign that have to do with your home purchase. If you don’t understand the different types of mortgages, terms, or mistakes to avoid, you may want to consult a good educational resource like www.mtgprofessor.com, a website sponsored by a Wharton School professor who is a specialist in this field.
Tip #5: Lock in your interest rate. Quotes are only estimates, and rates are subject to change. Although there are laws governing the use of GFEs, market forces can change the rates and costs before you get to closing. Small changes can have a big impact on affordability. To guarantee the terms quoted, ask for a written lock-in from the lender. (If rates drop, a lock-in can work against you, but remember that only the rate is locked in, not you.) Let the broker or lender know you are going to shop for the best deal.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other expert advice we can provide towards your financial well-being.
ROBERT BLAKELY, CFP® is a financial advisor with BLAKELY FINANCIAL, INC. located at 1022 Hutton Ln., Suite 109, High Point, NC 27262. He is the founder and president of Blakely Financial, Inc.
Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals.
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