How to Shop for a Mortgage
If you are thinking of buying or refinancing, chances are you are going to be looking for a new mortgage. Although this process may seem intimidating with unyielding options, there actually may be quite a few parameters that have more flexibility than you may expect. Certainly, there are some lenders who do have only a few programs that one might qualify for, but often there are more variations than the most popular programs. If you have ever asked a shopkeeper if there are different options “in the back”, this article is for you.
Rates and Points – Lenders often have different loan programs with variable relationships between the interest rate (which will affect the monthly payment) and points (which will affect the amount of money you need to come up with to secure the loan). For example, a lender may have a fixed interest rate of 3.25% with 1.5% in points or a 3.75% with no points. The key here is to do the math and determine what makes the most sense for the amount of money you have now versus what you have for a monthly payment. Let’s assume a $400,000 mortgage for 30 years at a fixed rate of 3.75%. The monthly payment would be $1852.46. If they also offered a 3.25% rate with 1.5% points, the payment would drop $111.63 per month but the loan would cost $6,000 more up front. So, you would need to keep the loan for about 54 months (4.5 years) for the lower payment to offset the added cost of the points.
Fixed vs Adjustable Rate – Adjustable-rate mortgages were seen as one of the prime causes of the 2008 mortgage meltdown. But when used correctly, they may be a good tool for certain homebuying situations.
Qualifications – If your debt-to-income ratio isn’t where it needs to be or if you are self-employed, see if your lender has creative options for getting you approved. Some lenders may have options that look at bank statements in addition to tax statements, are willing to look at a list of clients, or will also weigh a good credit score and credit history more-favorably. Additionally, if the property has been or has the potential to be an income-producing property, some lenders may allow that income to be factored into the debt-to-income equation.
Term – Most people have heard of a 30- or 15-year fixed rate loan, but what about a 20-, 8-, or even 40-year term? What about a 5-, 7-, or 10-year adjustable-rate mortgage? Again, it is worth exploring your options and understanding how the financial math works upfront, on your monthly payment amount, over the life of the loan, and how various interest rate adjustments may affect the payment plan in the case of an adjustable-rate mortgage. Ask your lender to provide these scenarios.
Since a hard inquiry into your credit will show up on your credit report, do what you can to determine available loan programs per lender before actually applying and consider being transparent about the issues you are concerned about to see if there is a potential workaround. If the lender indicates solutions exist, get that in writing and then proceed with your application when comfortable.
If you are in the position of evaluating lenders and programs, please consider us your resource. We would be happy to provide a referral.