Mortgage 101 - 5 Things to Know When Loan Shopping
, by Rob Kaufman
Here's a loan shopping quote taken directly from the FTC: "Shopping around for a home loan or mortgage will help you get the best financing deal. A mortgage — whether it's a home purchase, a refinancing, or a home equity loan — is a product, just like a car, so the price and terms may be negotiable. You'll want to compare all the costs involved in obtaining a mortgage. Shopping, comparing, and negotiating may save you thousands of dollars."
That quote is absolutely correct. Of course, making sure you get the best deal is easier said than done. That's why we've put together a few tips and items to look out for to make the shopping part of getting a mortgage a little bit easier.
5 Mortgage Shopping Tips
Take the "total cost" into consideration.
There are two parts to a mortgage: the "principal" which works in your favor because it helps you build equity in your home and the "interest" which is money that goes directly to the lender. When first shopping for a mortgage, you might think that those are the only costs involved in the transaction but there are more. Some of them include: closing costs, private mortgage insurance, property tax and points. Make sure you know all the costs and what they mean before deciding to which mortgage company you want to submit your application.
Annual Percentage Rate
The annual percentage rate (or APR) is the annual rate charge for borrowing and is a percentage that represents the yearly cost of funds over the terms of a loan. But when searching for a mortgage, APR isn't the end all be all. That's because the APR doesn't consider the rate at which the principal is paid down. Plus, APR bases future rate and payment modifications for adjustable rate mortgages on current index rates. That means things can change down the line including your rate.
This one is pretty simple: How long do you foresee yourself staying in the home you want to purchase? Long-term, fixed-rate loans stick you with higher interest rates. Short-term, fixed rate loans offer lower interest rates. So if you plan on staying in your home for only five years, you wouldn't want a 30-year loan because then you would've paid too much in interest. Decide on your timeframe of owning the property before deciding on what type of loan you want to take out.
Long-term vs. Short-term loans
Tied to #3 above, it's important to know that because longer-term loans hit you with higher interest rates, more of your monthly payment goes to the lender - instead of into your home's equity. This also means higher costs over the term of the loan. Shorter-term loans with lower interest puts equity into your home quicker and also reduces costs over the entire life of the loan. Do some analysis before deciding on long vs. short.
Closing Cost Financing
Many mortgage company reps or lending institutions might recommend adding closing and other costs to the loan amount. What you need to know is that when you finance these costs, you are paying for them your property's equity. Plus, the fact that you're paying interest on the loan means that in the long run you'll probably pay double or triple the original closing costs over the entire length of the loan. Another item to think twice - or more - about before applying for that loan.
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