Tuesday, January 15, 2008

How to Understand Your Mortgage Options


Buying a home or refinancing your current house? In this article we explore how the Residential Mortgage Business works so that you understand how to get the best deal for your situation.


Difficulty: Moderately Easy



Step One

In Vegas the house always wins because they control the floor - it's their house, their cards and their rules. The Mortgage Industry has traditionally been much the same way. If you've ever experienced getting a mortgage you understand; there are scores of banks out there all trying to offer you something different to get you to give them your business. The historically low interest rates over the last few years have increased the number of people seeking mortgages and this has caused even more new mortgage consultants, loan officers and such to enter the business.

The traditional laws of supply and demand would suggest that as more people have tried to sell mortgages, that you as the consumer would benefit by lower pricing - everyone tries to undercut their competition for your business. What's ironic is that for many consumers the opposite has happened; rather than paying less for the same information they have been convinced to take financing options that might not be right for themselves.

In order to help you decide what financing options are right for you when you're ready to take out a mortgage or refinance your existing one, it's important that we explain how the mortgage industry works and then evaluate how to pick the right mortgage product for you.

Step Two

Most people today think of getting a mortgage as borrowing money from a traditional bank. Even if you use an online mortgage site to secure financing, the metaphor that people apply is that of a traditional bank representative offering loans over the interent as opposed to in-person. Since the inception of the Mortgage Backed Securities Market in the early 1980s, the process of getting a mortgage has changed drastically.

While you can still go to your local bank branch for a mortgage, the industry has changed creating a new breed of Mortgage Brokers and Mortgage Bankers. These are professionals that are not associated with a traditional bank. Rather, they work for companies that exclusively offer mortgage products. These companies can range in size from a 1-person shop to multi-million dollar enterprises and can either be local businesses or based entirely off of the internet. While there are some differences between Mortgage Brokers and Mortgage Bankers, their general services remain the same. These individuals make us the Retail side of the mortgage business.

Just like an other industry where there is a Retail side, there is also a Wholesale side. Think about a Retail Store where you shop, the shop owner has to get his goods from a wholesaler. While it is awkward to think about mortgages as a Wholesale Good, it is the Wholesale Mortgage Business that is the backbone of the current mortgage industry.

There are dozens of Wholesale Lenders in the industry ranging from conventional lenders offering a wide array of products to specialty lenders who concentrate on a niche product type. Regardless, all Wholesalers operate in the same manner: they develop a suite of products and establish a sales force that goes out to the mortgage brokers and bankers to solicit their business. This sales force will offer the broker or banker competitive interest rates, great service and everything else that you can think of. However, what you can't think of is keeps the inner workings of the mortgage industry a mystery.

What is this mysterious offer? It's Called Yield Spread Premium and it is a major part of how mortgage brokers/bankers make their money. When a loan officer offers you a certain rate on your loan, the wholesale lender who's product he is offering is willing to pay him a specified amount of money for closing that loan. The higher the rate the loan officer is able to sell to you, the more commission he is going to get paid by the wholesa

Step Three

So, how do you negotiate the best deal for yourself when you get a mortgage?

First, know your financial-self. That may sound absurd, but most borrowers just don't have a realistic picture of their finances before they go to get a mortgage. Remember, you are the one trying to get money, so you need to know how qualified you are.

The first thing you need to know about yourself is your Credit. You need to know your credit score because it is the first indicator to a lender about how responsible you are for managing and repaying your debt. In addition to the credit score, you need to know about your credit history. The Score is just a table of contents that tells the reader something about you, but the history in your report tells a lot about your spending habits and how financially responsible you can be. If you have great credit, you can expect to get better rates, but borrowers with poor credit can't expect to get the same products.

Second, whether you are buying or refinancing, you need to know what your equity position will be in the property. How much will you owe against the value of the house. This "Loan to Value" Ratio tell's the lender how much you have invested in the house. Someone with little or no money down on a property has a lot less to lose, so the bank is forced to take a higher risk and, hence, offer a higher rate. There are many more financial factors, such as assets, work history, etc...that can go into determining your qualifications as well.

After you look at yourself, look at the offers in the market. Don't just go with the lowest rate or the one offering the lowest closing costs. Sometimes trying to go with the cheapest offer can wind up being the most costly mistake. In addition to looking up interest rates on the web, speak to a couple of mortgage brokers and see what they can offer. Discuss the different product choices that they have to offer to fit your lifestyle needs, but don't forget what we already covered about fees - don't think that costs are set in stone. In fact, there is HEAVY negotiability in terms of fees and rates.

Lastly, know your expectations for your mortgage. For example, if you plan on making this the home for life or you aren't going to refinance ever again, you can take advantage of the relatively low rates out there and lock in for 30 years. But, if you plan to move within a few years, or you know you will need to refinance your house again, you can take a lower rate ARM or ev

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