Big Time Purchase
I am writing for some advice about first mortgages. I am a 1st time homebuyer, and I recently bought a new condo. I will be meeting with my banker to discuss the mortgage, what are the most import questions I should be asking, and could you give me a list of requirements I should ask for to be included with my mortgage? What should I be aware of as a first time home buyer with no prior experience about mortgages? This is a huge financial decision and I want to make the right decisions from the start. I already know the rate I will be getting but not much else. As I had already been preapproved he wanted to do everything over the phone and I had to insist that I meet with him face to face. He never mentioned any mortgage closing costs over the phone, what should I be asking him about this. Also Mortgage Insurance, I already have life insurance through my work, will he ask me to take out more Mortgage Insurance or is my life insurance sufficient?
Thank you for any advice.
From a Loan Officer
I'm a mortgage loan officer and I have been in this business for ten years. Hopefully, I can offer some advice.
The first thing to know when looking for a great mortgage is that rate isn't everything. While, obviously you want a good rate, there are the fees to consider as well. Some companies will offer you a rate that is .5% lower than the competition, but they will kill you with "junk" fees. This is the mark of a company that does not care about its customer. Rather than being up front with you about the cost of the loan, they lure you with a low rate and try to earn their money with fees. Often, this can end up costing you more. You would be better off with a slightly higher rate and fewer fees.
An example of junk fees is processing fees. Processing is part of the company's job not an extra service or high overnight mail/courier fees. If you are not sure whether or not a fee is legitimate, ask the loan officer to explain exactly what the fee will get you. You should only be paying fees that the company actually has to pay to a third party (i.e. appraisal fees, credit report, flood certification, etc). If the fee goes to the mortgage company, it's junk.
Also, you will want to make sure you understand the terms of your loan. Is your loan a fixed rate or an adjustable rate? A fixed rate loan means the interest rate will remain stable for the life of the loan. An adjustable rate loan will have periodic changes to the interest rate. Make sure there is no pre-payment penalty on the loan. This is especially important since pre-payment penalties apply to ANY additional money that you might send toward the mortgage, not only to complete payoffs. Finally, make sure that you understand every paper you are signing. It is best to do this before closing. You may want to ask your loan officer for a blank closing package prior to the actual closing date. Since the documents are government regulated, the bulk of the papers will be the same. This will give you a chance to look everything over and have all your questions answered before you close.
Getting your first mortgage loan is a big deal and there are many other points that I could touch on. Most importantly, make sure you are working with a loan officer that makes you feel comfortable and is willing to take the time to answer all your questions. He or she should never make you feel as though you are being "stupid" or wasting their time. This is one of the largest purchases you will ever make and you deserve to have all of your questions answered.
A Very Thorough Mortgage Company
We bought our first home about 2 ½ years ago. The mortgage company had us read a workbook and then quizzed us to make sure we knew what we were getting into. There are many online calculators that will give you information about calculating your monthly mortgage costs. Most realty sites have links to them.
Remember that in addition to your P&I (principle & interest) which is what the most sites calculate, you will be paying money into escrow for taxes and insurance. You will also be paying a PMI (private mortgage insurance) if you put down less than 20%. Most first time buyer programs will allow you to put down between 3-5% if you do not have a lot saved up. The loan we obtained was a 5% no PMI loan. We had to pay one extra point at closing. A point is equal to 1% of your loan amount. This kind of loan is good for someone who can come up with more funds to put down but wants lower payments.
Compare lenders by their loan costs reputations. Ask friends and relatives who they have had good business dealings with, agents are often familiar with good lenders and can steer you away from problematic ones. Any reputable lender should be able to give you the costs associated with obtaining a loan through them. These costs are sometimes negotiable and often vary depending on the company. When you have selected your lender they will check your credit and will make sure anything questionable is resolved before they lend their money. They will expect any unpaid debts to be settled and ask for letters explaining any negative history. Finally, the lender will provide you with a good faith estimate. This discloses all costs expected to close on your home.
Questions To Ask
One of the most important items I think is if you are allowed to pay off the loan early without penalty. You may be able to make extra payments every month, which would pay it off early but make sure there is no extra charge for doing so.
Ask their history of selling accounts. Ours was sold so many times in the 10 years it took us to pay it off that I lost track. Unfortunately one mortgage company failed to notify us in time of the sell and I had already paid them, they sent the payment to the new company but did it after the "late" date. That was in 1995, I got this "black mark" off our record last month (10/00) and then only because I had kept copies of the letters about the matter and refused to "go away quietly".
Ask about a payment grace period. If you are out of town on an emergency how many days after the due date can you pay without being considered late and paying a late fee. Also ask how much the late fee is.
Ask if you can make a 1/2 payment every 2 weeks if you wish. If you are able to do this you will be making 13 payments per year and that extra will add up fast.
Do they require "mortgage insurance"? In my opinion this is a waste of money. The premium stays the same yet the coverage decreases with every principal payment. Better to take that money and buy life insurance to cover the home if something happens to you.
Does your escrow draw interest? I do not know this for a fact but have read that some states now require the mortgage company to keep the escrow in an interest earning account. Also ask how much by law they can keep over the actual amounts needed. Ask the process to appeal an escrow increase. One year ours went up, as usual, but I felt it was about $50 per month too high and refused to pay it. I was correct, if I had paid it they would have had in excess of $600 of my money at year-end. True, my payments would have gone down the next year but why should they have use of my money.
Real Estate Broker Adds Insight
I am a real estate broker in Missouri and have helped many first time homebuyers. When someone applies for a mortgage, the bank is required to send you a good faith estimate of costs associated with taking out the loan. After you apply for the loan, you should receive this within a few days. Take the paper out and read it all.
I would recommend applying at two banks. This way you can compare the "good faith estimates". This estimate will show you the type of loan you are being offered, the rate, and the fees you pay. It is normal to have to pay for an appraisal, flood letter, pre-paid interest, and hazard
insurance, tax service fee (if you are escrowing taxes), and you may have to pay a small fee to a title company or attorney to conduct the closing, you may also pay for title insurance.
Beware any extra fees the bank charges just so they can make more money. In our area, banks commonly try to charge buyers $175 or more in "document preparation charges". Watch these types of charges; ask the bank to waive them. They will if they want their business, which they do! Banks make millions on home loans; it's one of the things that keep them in business.
Save the good faith estimate until the closing. Some banks will waive their extra fees and sneak them back on the closing statement at the last minute. If they do this, refuse to sign until they change all the paperwork. Show them your good faith estimate to prove they waived the extra charges. Erin
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