How To Choose A Mortgage Loan That’s Right For You

How To Choose A Mortgage Loan That’s Right For You

Introduction


Selecting the best mortgage and mortgage rate requires calm diligence. There are a very few times in life when shopping wisely matters so much. Careful examination of the borrowing schemes or underwriting can save you tens of thousands of dollars and, in some cases, keep the roof over your head.

What Is My Situation?

An honest examination of your current situation and future prospects sets the stage for success. What size of monthly mortgage payment will be consistently affordable? Leave you room to maneuver around any economic downturns. For consumers, the biggest lesson of the subprime mortgage crisis is to not buy beyond our means, expecting that housing prices and job promotions will continue to grow your pockets

What size of down payment is possible for you? The bigger the downpayment, the better the mortgage terms that will be offered.


Where Do I Find A Lender?

Before house hunting comes the loan hunt. Pre approval for a mortgage impresses sellers and shortens your closing time. Real estate agents are better able to help their clients when they know the financing parameters.

Banks, credit unions and mortgage companies are first-line choices. A seller may finance the buy, as may family members. Mortgage brokers, whose job it is to connect borrowers with lenders, are involved in more than 50% of U.S. real estate loans. 

Brokers have connections with hundreds of lenders and are able to navigate the many options and provide the best rates available today. 

Lenders take into account credit history, employment status and the type of property sought to determines the loan limit. It’s useful to go armed with your credit rating from the major services, such as Equifax, Experian and TransUnion. The mortgage application is finalized when a choice of property is made.



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What Types of Mortgages Are Available?

There are many underwriting variations on the mortgage theme, and they’re often tough to compare effectively. Interest rates and fees among lenders not only are different but are expressed differently. Lower charges for some aspects may be balanced by higher charges for others. Be sure you are comfortable with your lender.  Be sure they are also large enough to have all of the required options. 

Fixed-Rate Mortgage (FRM)

Fixed-rate mortgages are popular because they’re relatively simple and low- risk. The most common types are 15- and 30-year Fixed Rate Mortgages, although other loan terms are available.

Advantages of a Fixed Rate Mortgage

  • Stable monthly payments
  • Rising interest rates have no effect on the cost of borrowing
  • The opportunity to make extra payments on the principal can significantly reduce the length and cost of the loan
  • The mortgage is paid in full by the end of the term

Disadvantages

  • Falling interest rates have no effect on the cost of borrowing
  • The interest charged is generally a bit higher for Fixed Mortgage Rates, because lenders assume the risk of any gap between your long-term rate and what they could get on a new mortgage in a tight money market
  • Penalties for paying off the loan early are often included, sometimes they can be hefty.

Adjustable-Rate Mortgage (ARM)

 Adjustable-rate mortgages are those in which the interest rate is altered periodically during the life of the loan. For most ARMs, the rate is fixed initially, commonly for one, three or five years, and adjusts for the remaining years. ARMs require knowledge and attention on the part of the borrower.

Advantages

  • Monthly payments go down if interest rates fall
  • Falling interest rates reduce the overall cost of the loan
  • The starting rate charged by lenders is generally less than for FRMs, because the borrower assumes the risk of unfavorable changes in the money market which can fluctuate over time.

Disadvantages

  • Monthly payments may go up significantly, sometimes leading to default
  • Caps on the monthly amount to safeguard the borrower can result in payments lower than the amount due, so the outstanding balance increases every month
  • Making extra payments to principal does not shorten the term of the mortgage and is therefore less helpful than with FRMs
  • Re-financing to avoid huge hikes may incur pre-payment penalties and may be impossible if the property has insufficient equity

Interest-Only and Negative-Amortization Loans

Payments on interest-only loans cover only the interest on the amount borrowed. The principal does not lessen during the term of the mortgage. Payments on negative-amortization loans cover neither the full amount of the interest nor the principal. Unpaid interest is added to the balance owed, which increases steadily.

Advantages

  • Monthly payments are lower
  • It is possible to carry a more expensive property than otherwise affordable

Disadvantages

  • Equity does not build up in the property
  • If the house drops in value from the time of purchase, on selling, the owner must pay the difference between the price received and the amount owed

The type of mortgage that’s right for you depends on your goals of ownership and the amount of risk you like and can afford. An investor planning to flip a property quickly would probably not choose a long-term, fixed-rate mortgage. On the other hand, someone who plans to stay in the house more than five years and is uncomfortable with risk might gravitate towards a Fixed Rate Mortgage, the most popular kind. Your guess about whether interest rates will rise or fall may influence your decision. You should consider that rates rise and fall over time and fluctuations in economic conditions may also affect your job and income.

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What Do I Need to Know About the Mortgages Offered?

The advertised interest rate is not the end of the story. Important information to compare includes how often interest is calculated, the number of payments per annum, adjustment frequency for ARMs and additional fees and penalties. Also consider the following aspects.

Interest and Annual Percentage

Comparison of the interest rate and the annual percentage rate (APR) is a clue to the value offered by the lender. The APR includes all of the costs associated with the mortgage, expressed as an annual rate. If it’s the same as the advertised interest rate, the interest rate is too high. If the APR is much more than the interest rate, the loan charges are too high.

Rates and Points

It’s possible to get a lower interest rate by paying a lump sump at the outset of the mortgage. This sum is calculated on the basis of points. Each point is 1% of the loan amount. Buying a lower interest rate can save money in the long run. Note that points paid are tax-deductible.

Associated Costs

Lenders are required by law to list their fees in a Good Faith Estimate. These charges include everything from the property appraisal to the recording fee. Many are valid, and others are an attempt at profit-making and can be negotiated away. Avoid lenders who won’t guarantee their estimates.

Loan Rate Locks

If interest rates are on the rise, they may be higher by the time the deal closes. Locking the agreed rate for 30 days, usually offered free, protects you against increases. Since you’re not obliged to conclude the arrangement with the lender, you can re-negotiate if rates go down in the interim.

Pre-Payment Penalties

 

Pre-payment penalties are assessed as a percentage of the loan amount or as a number of months of interest, usually six. If you wish to sell or re-finance the property before the mortgage term expires, you may owe many thousands of dollars. Pre-payment penalties are outlawed in some states, and there are lots of lenders that don’t use them. Other lenders will try to entice you to accept one by offering a lower interest rate.

 

Processing Speed and Bonuses

On average, mortgage loans take three to six weeks to process. Ask about the time required, any obstacles that may delay closing and how long it takes from final approval to receipt of the money, ideally less than 48 hours.

At closing, your loan officer is obliged to report any bonus he receives from the lender for securing you as their customer. Ask about it during the application process, when there is time to negotiate it.

Final Words

CambridgeHomeLoan.com can provide you the best rates in the industry. From FHA Loans for first time home buyers to conventional and Jumbo loans we can help.  Today there are many loan types outside of the government and conventional home loans called non QM lons. A non QM loan is a non qualifying mortgage.  With a non QM loan we can provide a statement only loan, foreign national loans, business statement only and a myriad of loans for those that may not want to or be able to provide the full documentation of the other loan types.

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