Tuesday, January 15, 2008

How to Shop for a Mortgage


Unless you have a stash of cash, you'll need to get a mortgage to buy a home. As of this writing, interest rates are at historic lows, putting home ownership within the grasp of many more people. Engage a mortgage broker to shop around for you, or dive in yourself.


Difficulty: Moderately challenging



Step One

Choose your mortgage rates and payment schedule. A fixed program keeps the same interest throughout. An adjustable rate mortgage typically starts out with a lower interest rate but can change, which generally means that it could change up or down periodically with lower rates for shorter periods, depending on the structure of the mortgage. Another option is the balloon payment, where early monthly mortgage payments are often lower, but then a large payment is required after a certain number of years. (These are generally chosen by people who know they'll move within five years.)

Step Two

Calculate how much you can afford to pay every month and choose your terms. Terms may be for 15, 20, 25 or 30 years. Obviously, a 15-year program lets you buy the house outright in half the time, but the monthly payment is higher. Choosing a 15-year mortgage will save you tens of thousands of dollars in interest in the long run, but the increased monthly cost may be unaffordable. The traditional 30-year fixed mortgage may be the most popular because of the lower monthly payment. Adjustable interest-only loans are also available for certain terms with lower monthly payments.

Step Three

"Buy down" the interest rate on a loan. For instance, paying a point on a loan--expressed as a percentage of the loan amount--may drop the rate by as much as one-quarter of a percent. Paying points makes financial sense only if you plan to remain in the house several years at least, enough time to offset the extra cost by paying lower interest. Finance the points to benefit from lower rates without paying for it out of pocket by adding such fees to the loan balance.

Step Four

Get your credit report before you apply. This report is available from the major credit reporting agency sites, Equifax.com, Experian.com or TransUnion.com and will be used by your lender to review your mortgage application. Most charge $12.95 for this service. Make sure any defaults, mistakes, or missing or outdated information are corrected before you start shopping for a mortgage. Get changes in writing.

Step Five

Contact the same credit reporting agencies to see your FICO score (Fair, Isaac & Co., the developer of the dominant scoring software used in the mortgage market), and to determine how much negotiating power you have with banks. The closer the score is to 800, the better. You may only get a single viewing of your magic number, which costs about $6.

Step Six

Start by shopping where you bank. Your bank or savings and loan may offer attractive terms for existing customers.

Step Seven

Contact a mortgage broker who has access to several lenders and can quickly compare rates to find you the best deal.

Step Eight

Shop online. Many online lenders offer low rates and quick turnaround. LendingTree.com will send your request out to four lenders for free.

Step Nine

Pay particular attention to loan closing costs, which are quoted once you are approved for a mortgage. These will differ from one lender to the next and can add considerable expense to obtaining a loan. Expect to pay anywhere from 3 to 6 percent of the overall cost of the mortgage. Credit unions often give their members great deals on closing costs.

Step Ten

Review your good faith estimate in detail before signing on for a loan. Lenders are required to provide you with a detailed breakdown of all costs associated with the mortgage.

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