Understanding Your Mortgage

Now that the housing market is heating up and gaining momentum, buyers are back out there looking for the house of their dreams. Because of this, we thought it was a good idea to talk about the importance of understanding your mortgage.

Many homebuyers spend more time negotiating the purchase price of a home than they do the terms of their mortgage, not knowing that a well-negotiated mortgage could save them more over the life of the loan than a drop in purchase price.

We saw some recent findings from a survey Zillow did on their real estate website. We found some of the results quite surprising.

1. 31% of buyers did not think they could get a mortgage for less than 5% down. This is not true. You can put as little as 3.5% down when you qualify for FHA financing. However, the down side of an FHA loan is you must pay an upfront Mortgage Insurance Premium to obtain an FHA mortgage. This premium went up from 1 percent to 1.75 percent a little over a year ago.

2. 34% believe lenders are, by law, required to charge the same fees to all clients for things such as credit reports and appraisals. This is not true. These fees can vary from lender to lender.

3. 1 in 4 people thinks they have to close their mortgage loan with the lender that prequalified or pre-approved their mortgage. This is not true. You can close with the lender of your choice regardless of which lender prequalified or pre-approved you for a mortgage.

4. 24% of homebuyers believe they can get the best mortgage deals by getting a mortgage through their local bank where they have their checking and savings accounts. This is not true. Your bank may be limited in the rates and terms they can offer. Competing lenders may be able to offer you more options and lower rates. Mortgage brokers oftentimes have a larger pool of lenders and programs they work with and can work with you and your personal situation to land you the best deal.

5. 34% did not understand the term ‘Annual Percentage Rate’ or APR. When considering the total cost of your loan, understanding the APR is very important. Whenever there are costs associated with a loan, there is an APR. The published interest rate is not the true cost of the loan. That rate only pertains to the cost of borrowing the principal amount of the loan. The APR reflects the effective cost of your loan on a yearly basis by taking into account the associated upfront fees and costs you pay to borrow the money. These fees include origination fees, discount fees, underwriting fees, etc. If the interest rate on the mortgage is 3.5%, but the APR is 4.25%, you can easily see the impact of these fees on the total cost of loan. Knowing the effect of the APR allows you to better shop rates and costs effectively.

When you are shopping for the right house, it is just as important to shop for the right loan! Get rates and quotes from several lenders and compare their fees and APRs. It makes sense to get references and referrals for different lenders and read lender reviews before making a final decision on a lender and your loan.

When you can lower your interest rate by a half a percentage point, you not only increase your buying power, you save thousands of dollars over the life of the loan. For example, if you borrow $100,000, you can reduce your payments by $28 a month when your rate is lowered by a half a percent. This amount, over 30 years, can save you $10,000. Additionally, the lower the Annual Percentage Rate, the less you are paying for the upfront costs and fees!

If you are a homebuyer and need help finding a qualified and reputable lender, give us a call. We work with several lenders who can get you set up with the mortgage loan that is right for you and your situation.