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When shopping for a home mortgage make sure you obtain all the relevant information:
- Research current interest rates. Check the real estate section of your local
newspaper, use the Internet, or call at least six lenders for information.
- Check the rates for 30-year, 20-year and 15-year mortgages. You may be able to save
thousands of dollars in interest charges by getting the shortest-term mortgage
you can afford.
- Ask for details on the same loan amount, loan term, and type of loan from
multiple lenders so that you can compare the information. Be sure to get the
Annual Percentage Rate (APR), which takes into account not only the interest
rate but also points, broker fees, and other credit charges expressed as a
yearly rate.
- Ask whether the rate is fixed or adjustable. The interest rate on adjustable
rate mortgage loans (ARMs) can vary a great deal over the lifetime of the
mortgage. An increase of several percentage points might raise payments by
hundreds of dollars per month.
- If a loan has an adjustable rate, ask when and how the rate and loan
payment could change.
- Find out how much down payment is required. Some lenders require 20 percent of
the home's purchase price as a down payment. But many lenders now offer
loans that require less. In these cases, you may be required to purchase
private mortgage insurance (PMI) to protect the lender if you fall behind
on payments.
- If PMI is required, ask what the total cost of the insurance will be. How much
will the monthly mortgage payment be when the PMI premium is added and how
long you will be required to carry PMI?
- Ask if you can pay off the loan early and if there is a penalty for doing so.
In addition, there is a long list of sources for mortgages loans: mortgage banks, mortgage
brokers, banks, thrifts and credit unions, home builders, real estate agencies and
Internet lenders.
Tips for working with lenders:
- Get recommendations: Ask friends and family members for suggestions, especially
if they've recently obtained a loan.
- Check credentials: Mortgage bankers are regulated by either your state's
department of banking or division of real estate. Check with the one appropriate to your state to see if a lender is in good professional standing. Mortgage brokers
may be state regulated or not. If not, check with the local chapter of the
National Association of Mortgage Brokers or the Better Business Bureau to see
if their record is clean.
- Do your homework: Learn about typical mortgages and ask questions when something
looks amiss; a broker may be trying to pad closing costs or other fees at your
expense.
- Take care online: There are plenty of attractive deals online, but first make sure
you're dealing with a reliable broker or lender.
The Real Estate Settlement Procedures Act (RESPA) requires lenders to give you
information on all closing costs and escrow account practices. Any business
relationships between the lender and closing service providers or other parties
to the transaction must also be disclosed. Many of the fees are negotiable. More
information is available from the Federal Trade Commission, the Federal Reserve
Board, and the Department of Housing and Urban Development.
| Type of Mortgage |
Fixed rate and adjustable rate mortgages are the two main types
of mortgages, but there is a wide variety of other mortgage products available. Below
are pros and cons of just a few of the mortgage products you may want to consider.
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| Pros |
Cons |
| Fixed-rate mortgage |
No surprises The interest rate stays the same over the entire term, usually 15, 20 or
30 years.
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If interest rates fall, you could be stuck paying a higher rate.
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| Adjustable-rate (ARM) or variable-rate mortgage |
Usually offers a lower initial rate of interest than fixed-rate loans.
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After an initial period, rates fluctuate over the life of the loan When interest
rates rise, generally so do your loan payments.
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| FHA (Federal Housing Administration) loan
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Allows buyers who may not qualify for a home loan to obtain one Low down payment.
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The size of your loan may be limited.
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| VA loan
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Guaranteed loans for eligible veterans, active duty personnel and surviving spouses
Offers competitive rates, low or no down payments.
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The size of your loan may be limited.
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| Balloon mortgage
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Usually a fixed rate loan with relatively low payments for a certain period of time
(about 5-7 years).
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After an initial period, the entire balance of the loan is due immediately This type
of loan is risky.
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| Interest-only |
Borrower pays only the interest on the loan, in monthly payments, for a fixed term
(about 5-7 years).
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After an initial period, the balance of the loan is due. This usually means much
higher payments, paying a lump sum or refinancing.
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Beware: Double Dipping
If you're working with a broker, the National Consumer Law Center recommends
you demand to know how much the broker is making from the lender as well as
from any fees you might be paying. It's best to get this information upfront
and in writing. Avoid a broker who is double-dipping-getting a fat premium
from the lender, as well as fees from you.
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For more information on home buying and mortgages, visit Fannie Mae's web site
at www.fanniemae.com or call 202-752-7000.
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