I was in the mortgage business for 10 years and, as a loan officer, helped many home owners figure out the best type of mortgage for them.
Types of Loans
There are Conventional loans and Government loans. The two types of government loans are FHA and VA. There are different qualifications and rules for the different types of loans.
If you are a vet, the first type of loan you want to look at is the VA loan.
Non-vets must choose between a conventional loan and an FHA loan. A good loan officer can help you choose.
I was in the mortgage business for 10 years and, as a loan officer, helped many homeowners figure out the best type of mortgage loan for them. I go into more detail on the rules in the paragraphs below.
Choosing between a fixed-rate and an adjustable-rate mortgage (ARM) is something you can think about intelligently before meeting with a mortgage loan officer.
Choosing a negative-amortization rate is always a mistake. The reason is that the balance on your loan continues to build, even when you make the required monthly payments. When you go to sell the home, you may find that the balance you owe is higher than the sales price that you can ask.
Choosing a 6-month adjustable-rate mortgage is asking for trouble, unless you are certain that you will be paying off the loan within 6 months. In a bad-to-normal economy, the rate will most likely go up every 6 months.
Choose a Fixed Rate If You Can
With an adjustable rate, you may have a very low payment at the beginning of the payment period.
But when it first adjusts, it always adjusts upward. Why? Because you are offered, as an incentive, a lower introductory rate that will expire at the first adjustment. Then there's a big jump.
The Pros and Cons of a 1-Year ARM
The main factor to take into account is that, at the time of your first adjustment, your rate will go up. It is quite possible that your rate will go up every time it adjusts. I lay out below how to calculate to see if the ARM is a good choice for you.
If you are in a tight financial situation and have a fixed-rate loan, consider refinancing to a 1-year adjustable rate loan (ARM).
For the first year, your monthly payments will be substantially lower. That may give you enough time to get through a financial challenge.
There are also 3-year and 5-year ARMS, but those rates may be close to the fixed-rate you already have. Still, they are viable options.
Avoid 6-Month ARMS
There are also adjustable-rate mortgages that have shorter terms than a year. Avoid these products. Having your mortgage adjusting every 6 months is a formula for disaster. As I've said above, your first adjustment will be upwards and by a good amount.
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Resist the Appeal of 15-Year Loans
You may want to pay your mortgage loan off early, in order to save money. But there is a free way to do this.
As you may know, mortgage loan payments are front-end loaded. That is, at the beginning of the loan, you pay a lot more interest than principal. For a monthly payment of $800, you may pay about $50 in principal payment (rough figures).
So every month, or at intervals, pay an extra principal payment along with your regular mortgage payment amount, and state in writing that this extra amount is to go towards your principal. You must put this into writing. If you don't specify that the extra amount goes towards principal, the mortgage lender will apply it to both principal and interest, and you'll save nothing.
By adding $50 to your monthly payment of $800 (rough figures), you will pay, not only your current month's payment, but the next month's payment in advance. The interest associated with your next month's payment will be eliminated. You will have saved $750 in interest.
That doesn't mean that you can skip a month of payment. Every month you need to send in your scheduled mortgage payment or you will fall behind.
If you prepay your principal monthly, It will add little to your payment and you will save all the interest associated with your next payment. To find out the principal amount, look at your statements from the lender to whom you are sending your loan payments. The statements should break down your payments into principal and interest.
Actually, you can send any amount extra. It doesn't have to be the exact amount of your next principal payment. But you must always specify in writing that the extra amount is to go towards principal.
Negative Amortization Is a Trap
Whatever you do, never sign up for a mortgage loan that involves negative amortization. (Amortization just means payments spread over time and calculated in a particular way.)
An interest-only loan is negative in that you build up debt every month that you do not pay your principal but only the interest.
Even a monthly payment that includes both principal and interest will build up debt if you are not covering your full monthly principal-and-interest payment.
Never Pay Less Than Your Full Monthly Payment
Some mortgage companies offer loans that don't require you to pay the full monthly payment every month. They may present this as a benefit for you.
Don't fall for this.
Every month that you do not pay the full principal and interest—plus other monthly fees like taxes, homeowner's insurance, and mortgage insurance—you go into the hole.
Some of these loans are called interest-only loans. That is, you will pay only the interest every month.
This may sound great when you first hear about it. But if you don't cover your full principal-and-interest payment every month, you will have to make up at the shortfall at some point.
Where will you get the money to catch up on the principal payments you've missed? If the housing market goes into a slump, you may find yourself owing more on the house than it is worth. And that's a highly undesirable predicament to find yourself in.
Mortgage Lenders vs. Mortgage Brokers
The main difference between a mortgage lender and a mortgage broker is that:
- Mortgage lenders approve their own loans.
- Mortgage brokers submit their loans to mortgage lenders, who then approve or deny the loans.
As a rule of thumb, it's smart to start with mortgage lenders first. Although some mortgage brokers are reliable, mortgage lenders tend to enjoy better reputations.
When you're considering loan officers, ask them to provide you with three references. If a loan officer is upset by this request, move on to another loan officer.
If you have a friend who is a realtor, ask him or her to recommend a reliable loan officer. An experienced realtor will usually have developed a long-standing relationship with a specific loan officer. If your realtor friend is not that experienced, ask her or him to get the information from a more experienced realtor.
Finding a Loan Officer
Get Advice From a Disinterested Party
Be sure to scrutinize the loan types available. If you don't understand what the loan involves, consult your local bank branch manager or a real estate attorney before signing papers or giving the mortgage lender any non-refundable money.
Don't accept without question a type of loan that seems "too good to be true." What seems too good to be true usually is.
Most mortgage loan officers and all mortgage brokers work on commission. So they may urge you to get the loan amount and loan type that will earn them the largest commission. Be wary.
If you don't understand the terms of the loan or how high the loan amount really needs to be, consult your local bank branch manager, who does not work on commission. Consulting your branch manager will not commit you to refinancing through them. You can still go elsewhere to obtain the rate you want. But the branch manager can help you get perspective on your situation and what type of loan you need.
Make Sure You Are Not Overcharged at Closing
When you make a formal application for your home loan, the lender must disclose the fees you will be charged. Hold onto the document that outlines your charges.
You'll be issued a final statement of fees at the time of closing. If unexpected fees have been added, especially lender fees, challenge them.
The closing attorney is working for you, even if he or she was recommended by the lender. And the attorney is required to ensure that you are not overcharged by any party to the loan, including the lender.
A loan closing can be an intimidating experience. But don't feel rushed. Look over every line item, compare it to your previous cost disclosures, and question anything you don't understand.
Even after the loan has closed, you still have the ability and the right to question the attorney about any fees. If they were unfairly charged to you, your attorney has a duty to see that those fees are refunded to you.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2011 Marian Cates