Making the Numbers Work for You

If you are shopping for a mortgage program, chances are that in addition to being overwhelmed by the sheer number of lenders willing to work with you, you are confused by all of the numbers and percentages thrown at you. Each of these numbers means something different, but all that really matters is whether or not you can afford the required down payment and the monthly payment amount for the life of the loan.  I’m here to show you that it is possible to make a loan program and interest rate work for you, and that you can lock in the right interest rate well before you sign the final papers for the purchase of your home.
Realtors have seen every type of buyer. They have also seen every type of mortgage loan work for a specific situation. No longer is it the case that a potential borrower visits a local bank and requests a mortgage.  Today’s savvy buyers are going online to find lenders and rates that are right for them.  Be a smart consumer!  Read the information below, and you will learn how to make a loan work for you, instead of following the traditional route.

Interest Rates: The Effect on Each Payment
The interest rate on your mortgage loan plays a large role in the monthly payment amount.  Generally, it can be assumed that a higher interest rate means a higher monthly payment amount.  The converse is also true: a lower interest rate means a lower monthly payment.

You Can Lower Both Your Rate and Payment
“Points” is a term that many first-time borrowers do not understand.  Basically, points are equal to one percent of the mortgage loan amount. So, one point on a $60,000 home would be $600.  At the time of closing, you will write a check directly to the lender that corresponds to the number of points that you are required or choose to pay.

Some lenders and loan programs give borrowers the option to pay discount points.  Discount points generally lower the interest rate on your loan by 0.25% per point paid.  There is usually a limit on the number of discount points that can be paid up front.

If you are short on cash, then the best loan for you will be one which does not require paying points, or one that requires very few points.  However, it is a good idea to pay points whenever possible to get a lower loan rate and therefore make lower monthly payments over the lifetime of your loan.

APR as a Comparison
What is APR? How does it differ from the interest rate of a mortgage loan? These are questions that buying clients frequently ask their realtors. After only a few months in the real-estate industry, realtors quickly grasp just how important it is for borrowers to be educated about the differences.  While an interest rate tells you the rate at which interest will accrue on your home loan, the annual percentage rate (APR) tells you the annual cost of the mortgage loan. The amount is expressed as a percentage which is calculated using the interest rate, any points paid, and other fees associated with the mortgage over the lifetime of the loan.

The APR can be one of your best areas for comparison when you are evaluating different mortgage programs.  Every lender is required to publish the APR for each loan program that it offers to consumers.  This requirement is intended to give consumers the ability to compare loan programs which may in fact offer identical interest rates and points.  Although the interest rates and points may be the same, there will be additional loan fees that are not disclosed in the marketing materials for the loan program.

The APR allows you to determine which of the competing loan programs will actually cost you less in the long run.

Lenders are also required to send applicants a “Truth in Lending Disclosure Statement” within three days of the receipt of a loan application.

Pay Attention to Fees
Most lenders pass to consumers the administrative costs associated with processing a mortgage application and closing a loan.  However, some lenders do not charge any origination fee.  Loans with reduced fees are becoming more common as interest rates rise, and they are more attractive to potential borrowers. The origination fee may also be called an underwriting fee, lender fee or processing fee.  Regardless of the terminology, be aware of what lenders are requiring you to pay and try to negotiate for reduced-fee loans.

Some of the other fees that you will need to learn about include the lender’s credit check fee, the title search fee, the appraisal fee and the documentation fee.  Each of these fees is charged to the borrower in one form or another.  Here’s a general description of what each type of fee covers.

The credit check fee is what the lender charges you to pull a copy of your credit report.  Some lenders will allow you to submit a recent credit report in lieu of paying this fee.  Take advantage of this option, since a credit report will cost you about $15, whereas the lender may charge you a significantly higher fee.

Most lenders also collect a title search fee. The purpose is to ensure that there are no outstanding liens against the property that you wish to purchase. Most of the time, you will pay around $100 for this service.

The appraisal fee covers the cost of an independent property appraisal which allows the lender (and you) to discover the true value of the home you are purchasing.  Generally, this fee will range between $100 and $500. If you are purchasing a multi-unit property, you will probably pay a higher appraisal fee.

Lock in the Interest Rate
If you have found the right mortgage program and lender for your needs, ask for a loan commitment from the lender.  A loan commitment does more than tell sellers that you are serious. It locks in an interest rate for a period of around 90 days.  By locking in a rate, you are protecting your buying power.

Be aware that many lenders will lock in interest rates for very short periods of time (5-10 days, in some cases) unless you request a long-term commitment.  You will need enough time to find a home, if you haven’t already, and to close on the purchase.  If you do not close on a home within the locked-in period, the interest rate associated with your mortgage may increase.

On the other hand, if you are shopping for a mortgage during a period when you think interest rates might drop, even a little, it might be wise to get the loan commitment without a locked-in rate. Lenders will often allow potential borrowers to watch interest rates, locking in the rate only when the borrower is comfortable doing so.  When watching interest rates, pay attention to the stock market and the economy in general.  But it is buyer beware. Once you have locked in an interest rate, you are stuck with it.  

Realtors have learned from years of experience how to help potential buyers like you use numbers to their advantage.  They can help you through the lending maze, because they know how lenders advertise and what the numbers really mean. Make an appointment to speak with your realtor today.