One of the most important, and quite possibly one of the most expensive, decisions you will ever make is when you buy a house—the house, your house—which will also mean getting a mortgage, which actually means so much more than just signing your name with a flourish on hundreds of documents at the closing table and getting the money you applied for.Shopping for a mortgage is definitely not an easy decision to make and it requires a great deal of commitment. Think of it as kind of like getting married—once you decide to jump in for the ride, you have to be ready for the long haul.
Sounds daunting, right?
Well, worry not! Here are some important points you can consider and they will serve as your guide on how to shop for a mortgage:
. Look for a suitable lender.
When shopping for the right mortgage for you, you must first look into the lender options as they are the ones responsible for financing your house purchase, which means that you’d have to look into what multiple lenders have to offer so you can weigh your choices properly.
This might sound like an easy process but you have to remember that even though lenders move around in the same industry, many of them have a lot of different things to offer, such as rates and programs, specials and fees, and each of them also have different standards. So looking at your lender options is important because the differing rates that the lenders offer is how mortgage credit rate is formed.
Now, when you’ve listed down your potential lenders, the lenders will put your credit under scrutiny and they will be making an inquiry. When they do so, each individual inquiry will cause your credit score to dip, and that could lead to a negative impact, so to avoid such a thing from happening, it is then best to submit your loan applications at around the same time because when you are running your credit, you will be entitled to a mortgage shop window by the credit bureaus to run your credit multiple times with only one inquiry.Create a plan when to run your credit and choose from among the lenders you ran your credit with.
. Understand your fees
Paying fees are unavoidable when you take out a mortgage, so it’s best to understand what they are, first and foremost, as different lenders will be charging different fees.
a. Mortgage APR – APR is also known as the Annual Percentage Rate and it’s a calculation made by the government that’s used to measure the total cost of the mortgage loan from the date of closing up to the date of payoff. However, it is worth noting that the APR is not worth everything, and that a lower APR does not mean it’s the best loan for you.
b. Points – These are also known as origination points, which it is normally used as a form of compensation for loan officers, or discount points, which is basically a prepaid interest, and each point is worth 1% of your total mortgage.
. Lock in Your Mortgage Rate
Because mortgage rates frequently and on a daily basis, it’s important to lock in a good rate whenever it is possible to do so.
So when is the best in to lock in your mortgage rate? A good number of borrowers usually lock in after the approval of their application, but many also would rather wait until they have already found a suitable home to purchase. This is because searching for a house could take an uncertain number of days, and having a longer lock-in period can be more costly.
. Know the Disclosures Being Used
Once you’ve submitted your loan application, the lenders will then provide you with a number of documents within 3 days. These documents are usually called upfront disclosures.
a. The Good Faith Estimate (GFE) – This document basically breaks down all the total settlement costs. These include the estimate of fees of the following:
- Origination fees
- Appraisal fees
- Credit report fees
- Prorated interest
- Homeowners and mortgage insurance premiums
- Document preparation fees
- Title search fees and title insurance premiums
b. The Truth-in-Lending Act (TILA)–This document is one of the first ones the lenders will send you way, and it is in this document that outlines the:
- Annual Percentage Rate or APR
- Total amount financed
- Total monthly payment
- Total finance charges
- Late payment charges
- Prepayment penalties
- Insurance requirements
- Assumability restrictions
c. The Loan Estimate – This is a new form that went into effect last October 3, 2015. In this document, you are able to garner important information, such as the estimated interest rate, monthly payment, closing costs, as well as taxes and insurance. This document will also provide information on, among others, how your payments and interest rate may change in the future.
. Make a Total Cost Analysis
It’s always wise to make an informed decision, so having a Total Cost Analysis will help you compare different loans, along with loans with corresponding points and loans without points side by side. In this way, you are looking at each loan from all angles, and thereby allowing you to make the best choice.
. Skip the Bagel
Take a look at the infographic above from Mortgage Coach. This information tells you that by using techniques to “skip the bagel and coffee”, you can pay off your loan earlier than you’d expect. One way to do this is by creating a personal “Loan Payoff Goal” and using bi-weekly payments to cut 7 to 8 years off your mortgage loan.