Here are the Top 10 most important things to consider when you're shopping for a Home Loan, Equity Line of Credit, or Refinancing:
Let's look at each of these in detail:
- Fixed Versus Adjustable Rate Mortgages
- Annual Percentage Rate (APR)
- Loan Types
- Loan Amount Qualification, Income
- Loan Amount Qualification, Expenses
- Employment and Credit History
- Sub-Prime Loans
- Down-Payment - As a general rule of thumb, lenders will be seeking contribution from you of around 3% to 6% of the total loan value. This can be negotiable, and there are many loan packages available.
- Fixed versus Adjustable Rate Mortgages – The two most common loan products available for home mortgages are fixed rate versus adjustable rate.
Fixed rate means that you agree on an APR (annual percentage rate) that does not change through the life of the loan, whereas, an Adjustable Rate Mortgage, better known as an ARM, means that rates and monthly payments can change, often tied to the U.S. Government Treasury Bills or some other form of “index”, with the frequency of change dependent upon the terms of the loan.
Deciding on which way to go involves many variables. We suggest that you start by examining the fixed rate products available on the market. They are by far the most popular, and arguably with the least amount of risk.
After evaluating several preliminary loan offers (quotes) for fixed rate mortgages, you can then venture into the world of ARM’s to see if one of these products may be right for you. But, proceed with caution, and understand all the risks, alongside any potential benefits.
- Annual Percentage Rate – APR, aka: “rate”, is arguably the most important consideration you must examine when
shopping for a home loan. The APR includes principle, interest, “points”, fees, PMI (Mortgage insurance), and other costs associated with the loan.
While all costs and terms are significant and affect the bottom line, we suggest that shopping rate is a very good starting point.
- Loan Types: There are several standard loan products to look for, including 30 year fixed, 15 year fixed, bi-weekly mortgages, 1 month ARM’s, 5 year fixed ARM’s, 2nd Fixed, ARM’s with a provision to convert after 5 years, lender
buy-downs, and discounted mortgages.
We think the best place to start, is to obtain quotes for a 30 year fixed rate loan, and then go from there. 30 year fixed rate loans generally produce the lowest monthly payments for fixed rate products, and they are relatively safe.
Once you know where you stand with a 30 year fixed, after obtaining quotes from several lending institutions, then you can consider the possibility of exploring more exotic loan products. At this juncture, you will want to consult with those you trust, for good, solid advice and feedback on risk versus reward.
- Loan Amount Qualification, Income: This can vary widely depending on you, your lender, and many other variables. However, as a rule of thumb, look at 2 to 2 ½ times your current household income, as a baseline to determine how much you can afford to borrow.
- Loan Amount Qualification, Expenses: This is another broad category that varies from one lending institution to the next. However, there are two general factors to look at, and they are Housing Expenses (such as mortgage, property taxes, and insurance), and long-term debt (which can include credit cards, auto loans, etc.).
First, add all your expenses together. As a rule of thumb, you will want your expenses to not exceed 33% to 36% of your gross household income. Second, examine your housing expenses only. As a rule of thumb, you’ll want these expenses to not exceed 25% to 28% of your gross household income.
- Employment and Credit History: Lenders generally want to take a look at your employment history so that they can see a pattern of stability and income.
Lenders generally also want to take a look at your credit history, so that they can see a pattern of borrowing and repayment in your past. Lenders cannot discriminate and must use this information solely for the purpose of considering your ability to repay a loan. Also, many loan products are available for all kinds of customers, with varied financial backgrounds and histories.
- Points: Points are one of the primary fees charged on the loan, and they represent the profit earned by the lending institution. One point represents one percent of the total loan amount, and points are usually tax-deductible (along with the interest paid on the loan). They are broken down into two basic types:
- Origination Points – Origination Points are the fees charged by the lender, and represents their gross profit.
- Discount Points – Discount Points are most often charged in association with a lowered interest rate. In other words, the Discount Points represents a dollar amount, as a fee for giving the borrower a lowered APR (lower than what the lender might otherwise charge).
- Sub-Prime Loans: Sub-Prime Loans consist of loan products designed for customers with challenging credit and financial backgrounds, or, customers that are looking to re-establish credit.
They can be significantly higher then the prime lending rate, with less favorable terms (Often times, the loans are for the short-term, such as 2 to 3 years). However, they do offer a venue for certain individuals, and they can allow customers to re-establish credit, or buy new homes prior to cleaning up a credit history, etc.
For some of you, this avenue may offer exactly what you’re looking for. It’s important to know that lenders who specialize in sub-prime loans are out there and want to earn your business.
However, we advise that you proceed with caution. Be sure to gather sound advice from trusted friends and professionals, and understand all the risks versus rewards, prior to signing on the dotted line.
- Short-Forms: The most important thing you can do as a consumer of loan products is to shop around and get several preliminary loan quotes for your consideration.
These are no risk, no obligation, preliminary loan offers. They take 30 seconds to 2 minutes to complete, they require no personal or confidential disclosure on your part, and they require no commitment from you.
We suggest that you obtain 3 or 4 offers. You can then examine and compare the terms, rate, fees, and all other pertinent information about the loan product, and the lender, at your leisure and in the comfort of your own home.
We’ve enjoyed providing this information to you, and we wish you the best of luck in your pursuits. Remember to always seek out good advice from those you trust, but never turn your back on your own common sense.
About the author:
Tom Levine has been involved in insurance and finance for over 14 years, and
provides a solid, common sense approach to solving problems and answering
questions relating to consumer loan products.
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