Shopping for a Loan
When shopping for a loan it is important to understand all of the various risks and benefits of the different loan products that are available.
• The majority of residential homebuyers choose conventional 30 year loan products. These products provide the most long term certainty for a buyer because they lock in the principal and interest payment for the next 30 years, and they leverage the time value of money, which is the theory that a dollar today is more valuable than it will be in the future because of inflation.
• Some buyers choose Adjustable Rate Mortgages (also known as ARMs). An ARM typically has a lower rate than a 30 year loan but the rate is subject to change in less than 30 years. The most common ARM is a 5-year ARM. With a 5-year ARM, the lender has the right to change the interest rate on the 5th anniversary of the closing. The rate is normally a spread over some benchmark rate. For instance, it might be the Prime Rate as stated in the Walll Street Journal plus 2%. If the Prime Rate in the Wall Street Journal at the time is 4% then the new interest rate for the buyer would be 6%.
• A buyer's eligibility will be in large part based upon the buyer's credit score. There are 3 major credit reporting agencies. These agencies use a FICO score to determine the level of credit risk a purchaser poses should they be given a loan to buy a home. These scores can vary from company to company for a variety of reasons. It is important to note that your credit score can be negatively affected the more times inquiries are made so be careful when shopping for a lender to avoid having too many inquiries made during the process.
• While most loans are still sold by the lender to Fannie Mae, the lenders typically retain the "servicing rights." The servicing rights mean that you pay the lender your monthly payment rather than Fannie Mae. The servicer is important because the buyer will end up dealing with the servicer rather than Fannie Mae so being able to contact the servicer easily is important. Because of the importance of servicing these days, many purchasers have decided to avoid the larger banks and deal locally with credit unions and other local lenders.
• Even if you are inclined to deal with a larger lender, we recommend dealing with a local mortgage broker. The mortgage broker becomes your local advocate when dealing with the lender. Most mortgage brokers are looking at the rates on a daily basis so they may have more pricing flexibility than a credit union as well.
• Because mortgage interest is deductible for most taxpayers, it is important to consult your accountant or financial advisor before choosing a loan product so that you can best maximize the tax advantages of homeownership.
• In order to understand the likely bank fees involved in the transaction, the lender should provide you with a Good Faith Estimate showing the estimated costs for borrowing money and closing on a loan.