Mortgage 101

A zero point loan is one where the Lender is paying me for your loan. A zero cost loan (no out of pocket cost to you) is a loan where the Lender is paying me my fee and your costs for the loan, so that I can afford to pay all the little fees that add up to a tidy sum. In these cases you get a higher interest rate for a lower (or no) cost. This isn’t the best route for everyone, read on for details.

Rate shoppers are vulnerable to inaccurate interest rate quotes, price quotes and service promises. There are unfortunately many fees to any loan and most are now revealed in the loan estimate document. Your loan is serious business that should include LIFETIME service. It begins a relationship that can serve you well long after your loan is funded. It may be more valuable to pay 1/8th more in rate (.125%) than to be old news when much later, you need a copy of your closing statement or advice on how to determine interest paid for taxes. If you grind your loan agent, you probably will not get a very good value for your efforts. Do it yourself lending is alive and well for those who have the time, money, and patience to risk it.

All lenders are in business to make money. I would rather do ten loans at a fair price than to soak someone once. This has changed with more consumer protection.

If you are buying a home, get your loan approved before you even shop for a home. You can get a pre-approval even if you are self-employed. If you are looking for a competitive fixed rate loan, or higher loan to value (more that 80% of the purchase price), then you may need tax returns, pay stubs, etc. If you are putting down 20% of the purchase price or more, and you have decent credit, you may benefit from an expedited timeline. I sometimes recommend adjustable rates for purchase loans unless you cannot sleep at night without a fixed rate or rates are particularly low.

Rates change daily, sometimes more than once the same day. Trying to float a rate (not lock) until you can be certain of the closing date can be nerve racking. Since rates go in cycles, why not lock the fixed rate of your dreams as a refinance after you close your loan? Your real estate agent will love you.

Another alternative is a short term fixed, like a 3, 5, or 7 year fixed period followed by an adjustable period. Whatever you do, follow these rules;

UNLESS YOU ARE EXTREMELY SURE THAT YOU WILL KEEP THE HOME OR THE LOAN FOR MORE THAN FIVE YEARS, INVEST AS LITTLE AS POSSIBLE IN “POINTS”. POINTS ARE PRE-PAID INTEREST TO BUY A LOWER RATE AND AREN’T WORTH IT IF YOU DON’T KEEP THE LOAN LONG ENOUGH TO RE-COUPE THE EXTRA COST. BE CAREFUL OF COSTS!

Example

$100,000 x 4.00% = $4,000/year or $333.33/month.

$100,000 x 4.25% = $4,250/year or $354.17/month interest only

 

If you pay $1,000 to get 4% (one point) you will save approximately $20.83/month in interest. It will take you 48 months to re-coupe the one point. $1,000/20.83 = 48.0077 months. Most people in our society change homes that frequently. Even when they don’t, other life changes call for new financing. Do the math or I will do it for you to determine which way is better for you.

Everyone’s needs are a bit different so let’s talk about it.

AVOID PRE-PAYMENT PENALTIES. BE SURE TO ASK IF THERE IS ONE AND HAVE IT POINTED OUT IN YOUR LOAN DOCUMENTS BEFORE YOU SIGN. THE DOCUMENTS WILL ALWAYS STATE THAT THERE IS OR ISN’T A PRE-PAYMENT PENALTY.

The cost of a loan with a pre-pay is less, until you have to pay the penalty. Typically you pay more than four times in penalties than what you have saved in cost. Even if you feel certain that you are going to keep your home forever, don’t make this mistake. No one has a crystal ball. Families suffer deaths, changes of job, divorce, and other unpredictable events. Your lender will not forgive a penalty. For some people, on some occasions a short (one year or less) pre-pay might be acceptable. It depends on your needs. Take time to think it out and talk it over.

ONCE YOUR LOAN HAS BEEN APPROVED, TRY TO GET A COPY OF THE LOAN DOCUMENTS TO REVIEW IN ADVANCE. ON REFINANCES YOU HAVE THREE DAYS TO CHANGE YOUR MIND AFTER SIGNING BUT IN A PURCHASE THERE ISN’T A RECESSION PERIOD. CHECK THE TERM, RATE, PAYMENT, AND PRE-PAY BEFORE SIGNING.

The sad truth is that some people will try to take advantage of others. A real estate loan is a big deal. Take your time to do it right.

We will be happy to chat with you as long as you wish. You can reach us easily. My job is to help educate you to make the best decision to suit your needs. I will ask you a lot questions. You can ask me even more. THE MORE YOU KNOW, THE BETTER IT IS FOR BOTH OF US.

The loan process is as follows;

  1. Consultation: talk to us about what you want and who you are.
  2. Application: mostly signing paper, a few easy questions.
  3. Processing: we order credit report, appraisal, and title report.
  4. Submission: we send your package to the source that offers what you want.
  5. Approval with conditions: believe me, there’s almost always something.
  6. More processing, order insurance.
  7. Locking the program or rate: this step can occur earlier if appropriate to your needs.
  8. Ordering loan documents
  9. Signing loan documents: done with a notary, often at an escrow company.
  10. Funding: the Lender wires the funds to the closing agent.
  11. Closing: your loan documents are recorded and funds are distributed.

Turn around time vary from a few days, with private party loans, to many months, in the case of newly built homes. Yes, approvals can be same day, but they are therefore conditional. Rates can be locked anytime, but better pricing is available after approval. Most loans are commenced and completed in 3 to 5 weeks.

We earn our fees by counseling you to find the best fit to your individual needs and then preparing and shepherding your application through the process. It is a very creative occupation that seeks to overcome issues as we go along. Certainly there are easier loans and harder loans. We do whatever it takes to get the job done as quickly as possible. We would rather quote high and deliver low, estimate longer, and get done sooner, and manage your expectations so that we are realistic and you are not disappointed. It isn’t that hard, it’s our orientation.  And it pays us great dividends in repeat and referral business.