If you usually pay whatever people ask and now are closing in on a new home, let your mortgage be the reason to discover the power of comparison shopping.
It might not seem like much to drop one-quarter percent, but over the life of a 30-year mortgage, that move can save you a bundle.
How important is it?
”Extremely,” says Al King, senior vice president and manager in the mortgage department of First Federal of Michigan.
For example, suppose you have a choice between a 30-year, $100,000 mortgage at either 9 percent or 9 1/4 percent. By dropping one-quarter percent, you`d save $18.06 a month. However, your total savings would be about $6,500 in interest, adding all those $18.06 months for the life of the loan.
But interest rates on the mortgage are only one facet of comparison shopping on the loan.
Different lenders charge different fees on their loans. Some offer lower interest rates, but tack on extra ”points,” each equaling one percent of the loan. Others charge few if any points, but hike their interest rates.
The bottom line
In the 1970s, the federal government ruled that lenders had to provide consumers with an annual percentage rate that reflected both the loan and fees of obtaining the loan. That`s the rate you should ask for when trying to determine whose is the best.
”People call up and say, `What is your rate?` ” says King. ”But the true rate search ought to be for an annual percentage rate, which involves the interest rate on the loan plus the cost to acquire the loan.”
Important as rates are, they`re not the only thing to consider when it`s time for the mortgage.
”The thing you should be looking at in addition to the dollars is who are you dealing with,” says Ron Melnik, vice president in the mortgage department of Standard Federal in Michigan. ”What kind of servicing are they going to get, how convenient will it be to deal with these people?”
Melnik notes that acquiring the mortgage may only be the beginning, not the end, of your relationship with the lending institution.
If, during the life of the loan, you can`t make a payment, you may appreciate the proximity of a local lender.
Also consider other features the institution may offer.
Can you make additional, penalty-free payments against the principal of the loan, should you decide to build equity in the mortgage? What fees are involved in the mortgage? And can you make a 13th payment one year if you choose to increase your income tax interest deduction?
Loan qualifications
The guidelines for qualifying for a mortgage are generally uniform. Your housing expense-principal, interest, taxes and insurance-should not be more than 28 percent of your stable monthly gross income, most lenders say. Gambling winnings or a little extra overtime one month won`t count.
”Stable,” according to most lenders, also means you`ve been on the job at least two years.
Another important measure in qualifying for a mortgage is the applicant`s total debt. Prospective homeowners with a sizable income but tremendous debt- large credit card balances, car loans, student loans-would likely have a more difficult time qualifying than someone with a modest income who is debt- free.
Your total monthly payments, including the new mortgage but excluding food, utilities and insurance, generally should not exceed 36 percent of your income.
These are only guidelines. They sometimes are broken if you make a compelling argument for why an exception should be made.
Once you`ve applied for the loan, the lending institution takes over, checking whether the property is worth what you`re prepared to spend and whether you are a good risk.
”We do an appraisal of the property,” says Melnik. ”We`ll also order a credit report. During the process we would have ordered title insurance on the property to make sure it is clear, and a property survey to determine that there are no encroachments on someone else`s property line.”
This all takes about three weeks. Fees run about $250, and they`re usually non-refundable, so you don`t want to apply unless you have a reasonable expectation of being approved.
Once that`s all done, however, you`re in the home stretch and ready for the closing.
