NYSBD: Shopping for a Mortgage

Consumer Help and Information

Shopping for a Mortgage: What you need to know

Buying a home is probably the biggest financial commitment you will ever make. It is therefore extremely important to shop around for the loan that gives you the best interest rate and meets your other financial needs as well.

Examine Your Finances and See What You Can Afford:

The maximum amount of your mortgage will be based on your debt (outstanding credit, monthly bills, leases, alimony payments, etc.) divided by your total gross pre-tax income. This is your debt to income ratio or “DTI.”
A “down payment” is cash that you must pay up front in order to close the sale. Determine what your down payment will be and how much of monthly mortgage payment you can afford. Lenders may qualify you for as much as they are willing to lend, which can be more than you can afford. Calculate what you can manage each month at the Fannie Mae Website. http://www.mortgagecontent.net/scApplication/fanniemae/affordability.do
Obtain copies of your credit reports from all three credit reporting agencies, Equifax (www.equifax.com), Experian (www.experian.com) and TransUnion (www.transunion.com). Obtaining your credit report before applying for a mortgage gives you time to challenge any missing information, errors, or other discrepancies. In addition, you may need to take the time to repair your credit before you attempt to get a loan. If necessary, you can put a statement on your credit report to explain any issues you can’t repair or have removed.
Gather all of the documentation that you will need to submit with your application. The application will ask for information about your job history, income, assets (property, cars, bank accounts and investments) and liabilities (auto loans, installment loans, other mortgages, credit-card debt, household expenses, etc). You will need to have paycheck stubs, bank account statements, tax returns, investment earnings reports, rental agreements, divorce decrees, proof of insurance, and anything else that will support the information in your application.
Visit your bank and ask to speak with a loan officer to see what kinds of loans are available and at what rates they might be willing to offer them. Look in the real estate section of your local paper for the rates that other banks or brokers are offering.
Get pre-approved or pre-qualified. With a pre-approval or pre-qualification letter in your hand, you're immediately in a stronger negotiating position with any seller.

Pre-Qualification is an informal agreement between you and a lender. The lender gives an opinion on how much it thinks it will be able to lend to you based on information that you have provided. Your bank doesn't do a credit check. It relies only on your description of your finances. There is no charge to do this and you are not obligated to get a mortgage with that lender if you find a better deal. The lender can also decide not to give you the loan if the information you provide is found to be inaccurate.

Pre-Approval is a more formal agreement than the Pre-Qualification since the lender checks your credit history, employment information, assets, and liabilities before providing an opinion as to how much it will be able to lend you and at what interest rate. Some lenders charge for a pre-approval.

Shop for a Lender:

There are basically two ways to go about getting a mortgage – going directly to a lender or through a mortgage broker.

Direct Lenders have money to lend and make the final decision on your application but may have a limited number of loans to offer. You deal directly with the lender with an intermediary.
Mortgage Brokers are intermediaries who can deal with a number of lenders to obtain your loan. Mortgage brokers should make inquiries to a number of lenders on your behalf in order to obtain the best loan terms for you. If you have special financing needs or can't find a loan by dealing directly with a lender, an experienced mortgage broker may be able to find you one. Brokers, however, charge a fee based on the amount you borrow.

Mortgage brokers must be registered with the New York State Banking Department in order to do business in New York State. Visit http://www.banking.state.ny.us/simbroke.htm to see a full list of registered Mortgage Brokers.

Shop for a Loan:

Compare fixed-rate mortgages with adjustable rate mortgages (ARMs) to determine which type best fits your current financial situation and your future plans 5 to 30 years down the road. You will need to consider the following:

When you obtain the loan, you agree to pay a certain basic rate of interest, which may be fixed or adjustable.
When you close on your mortgage loan, you will often pay points (also known as mortgage points, loan origination fees, or discount points). Points are a type of fee paid at closing by you to your mortgage lender and/or mortgage broker. One point equals 1 percent of the loan amount. (More on points below.)
The interest rate and the points comprise the "Annual Percentage Rate," or “APR,” which will be higher than the basic interest rate since it is a combination of the two.

Your decision should depend on the rate and other terms at which a loan is being offered, how long you intend to stay in the home and whether you believe market rates will go up or down during that time. If you intend on moving in a short period of time, an adjustable rate mortgage may be a better choice. The interest rates on long-term fixed rate loans are higher than those on short term ARMs, so if you have a fixed rate loan and the market rates decrease you may be stuck with a higher cost loan.

What is a Fixed-Rate Loan?

With a fixed rate mortgage the interest rate stays the same throughout the entire term of the loan. This allows you to repay in periodic (usually monthly) payments of principal and interest that are always the same in amount. If a lender requires you to make partial payments of insurance premiums or school, property or other taxes together with your monthly loan payment, the amount of your total monthly payment might increase over time, but only if your premiums or taxes increase.

What is an Adjustable Rate Mortgage (ARM)?

ARMs (also called variable rate loans, adjustable rate loans or adjustable mortgage loans) have an interest rate that can change periodically throughout the term of the loan. Any change in the interest rate on your loan changes the amount of your monthly payment. Some ARMs will have an initial fixed rate that turns into an adjustable rate after a certain period.

The changes in the rate happen at the end of a rate adjustment period. Adjustment periods differ from loan to loan, Six month and one year ARMs are probably the most common. The length of the rate adjustment period for an ARM loan must be disclosed in advance, in writing, by the lender.
Each ARM loan rate is based on an index. Lenders can choose from a variety of indexes, such as the indexes of the rates paid for six month or one-year Treasury bills, or the monthly average rate on the sale of existing homes. Some indexes tend to be subject to more volatile movements than others. The lender must disclose in advance, in writing, the index to be used for the loan together with a history of the movements in the index.
While the ARM loan rate and the ARM index rate move up and down together, they are rarely going to be the same rate. Usually a lender will establish the loan rate at a margin of 1%, 2% or more above the index rate.
Under New York State regulations, state-chartered banking institutions and all licensed mortgage bankers are required to use the same index throughout the term of the loan and to maintain the same margin between the loan rate and the index rate for the entire term of the loan.

Lenders sometimes offer rate caps with their adjustable rate mortgages (ARMs). Usually, there are two types of rate caps: A per-adjustment cap, which specifies the most your interest rate can rise from one adjustment period to the next and a lifetime adjustment cap, which specifies how much your interest rate can rise over the life of your loan. Caps are usually quoted as two numbers with a slash between them (i.e.: 2/6). The first number indicates how much a loan may adjust each period and the second number is how much a loan may adjust over its lifetime.

A Rate-Improvement Mortgage is a fixed-rate mortgage that gives the borrower a one-time option to reduce the interest rate in the early years of the mortgage term without refinancing (paying off the old loan with a new loan.)

A Balloon Mortgage behaves like a fixed rate mortgage for a certain term (usually five to seven years) and then the outstanding principal must be paid in full with a single ‘balloon” payment.

A Hybrid Loan is a fixed rate loan for a certain period (1, 3, 5, 7, or 10 years) and then converts to an ARM. They can provide a period of stability for the beginning of the loan and then depend on the prevailing interest rates once the initial fixed period is over.

Two-Step Loans attempt to provide the best of both worlds: the stability of a fixed loan with the lower rates of an ARM.

They most commonly appear as 5/25 or 7/23 loans (adding up to a 30-year loan). This means that the interest rate will be fixed for the first five or seven years and then will become an ARM, adjusting annually, or a fixed-rate loan. The beginning interest rate for these loans is generally lower than that of a standard 30-year fixed loan.

A COFI or Cost of Funds Index Loan doesn't have any caps, and adjusts monthly. It is tied to an index that measures what banks have to pay their depositors to keep their money (i.e., checking accounts, savings accounts, certificates of deposit). This index is very stable and moves very slowly. The COFI loan has certain advantages in that you can vary the amount of your payments as you wish (paying off more or less each month).

A Reverse Mortgage (also known as a reverse annuity mortgage or reverse mortgage) provides that instead of a borrower making payments to a lender a lender makes payments to a home owner. Homeowners over the age of 60 can use the reverse mortgage to convert the value of their home into cash in the form of monthly payments or lines of credit. Applicants qualify based on the value of the home rather than their income and the loan does not have to be repaid until the homeowner sells the house or passes away.

Refinancing is the act of paying off an old loan with a new loan using the same house as security, usually to stop having to pay for mortgage insurance, to switch from a fixed-rate loan to an adjustable or vice versa, to take advantage of lower interest rate and/or to borrow additional cash from the lender.

Can I Shop for a Mortgage Online?

Yes. Certain aggregator Websites can help you comparison shop for the lowest mortgage rates. They will help you easily compare several loans at once. Even if you're not ready to apply for a loan, they can be useful for gathering information. You will be able to get a general idea of what your rates might be, but for more accurate quotes, you will have to provide detailed personal information which means they will most likely check your credit rating.

Each inquiry will show up on your credit report. Credit scorers will disregard inquiries made within 30 days after you've been given a credit score. More important, they regard inquiries within any 14-day period as a single inquiry, so whether you use the Internet or not, you should do all of your mortgage shopping within a 30-day period.

There Will Be Other One-Time Costs When You Close Your Loan.

Application Costs – An application fee may not be based upon a percentage of the loan amount. Some brokers do not charge an application fee. The application fee may be non-refundable and does not guarantee that your application will be approved. In some cases, if a loan is approved, the application fee may be applied to closing costs.
Credit Report Fee – If you pay for one you must be provided with a copy upon request.
Appraisal Fee – Cost of an Appraisal on the value of the property you are looking to purchase. If you pay for one you must receive a copy upon request.
Insurance on Down-Payment – Lender may require insurance on a less than 20% down-payment on a single-family dwelling.
Closing Costs – You will have other one-time costs at the time you close your loan. In New York State, these will include: title search & guarantee, mortgage recording tax, attorney's fees (for the bank's attorney, in addition to your own), and property survey.
Escrow Account – The terms of most mortgages require that all property taxes and insurance premiums be current or the borrower(s) could be found to be in default. Mortgage escrow accounts are accounts in which money included with the monthly principal and interest payment is deposited by the lender into an account that is used by the lender to pay property taxes, fire and hazard insurance premiums, mortgage insurance premiums, and other escrow items when they become due. Escrow accounts guarantee that there is always enough money to pay these bills on time and to avoid the risk of lapsed insurance or delinquent taxes and default under the terms of the mortgage.

More on Points

Points are a type of fee paid at closing by you to your mortgage lender and/or mortgage broker. Each point equals 1% of your loan amount. Discount points can be a good idea if you plan to stay in a home for some time since they can lower the monthly loan payment.

There are two types of points: origination points and discount points.

Origination Points are charged to recover some of the lender’s costs of the loan origination process. Usually, your Loan Officer's compensation will be based on the origination points and may be negotiable.

Discount Points are paid to lower your interest rate. This is known as a rate buydown. A general rule of thumb is that one full discount point will lower your fixed interest rate .25% or your adjustable rate .375% for the term of the loan. There is usually some flexibility by the lender in determining the actual buydown formula, but not as much as with origination points.

Every lender's pricing includes different levels of discount points. They may offer options with no points, 1 point, 2 points or more. The more points you can pay, the lower the interest rate the lender will offer you. It is common for each option to include fractions of points (for example, 1.25 points).
Some lenders will advertise 0 point interest rates while others will list their lowest possible rate with points attached. When comparing loans, make sure you know all the fees that will be charged. A lender offering 7.0% + 1 discount point but 0 origination points may be a better deal than the lender offering the same rate with no discount points and 1.5 origination points. Before you make a decision, consider all the details, not just the interest rate.
The IRS considers discount points to be a form of prepaid interest. This means that they can be deducted from your taxable income. The IRS generally requires that you deduct points over the term of the mortgage loan, unless you meet certain requirements. For more information visit the IRS at http://www.irs.gov/taxtopics/tc504.html
Points and other fees can be paid from funds provided by the borrower(s) or financed from the proceeds of the mortgage loan. Payment of the points from the loan proceeds may increase the loan amount thereby making it more expensive over the life of the loan.

A Checklist When Applying for a Mortgage:

How is my credit rating?
What kinds of mortgages are available? At what rates of interest?
Will I have to pay a non-refundable application fee?
How many "points" can I pay? If so, what is the starting interest rate compared to adjustable rate mortgages?
What additional charges can I expect from the lender when I sign the final agreement for my mortgage?
What further costs (legal fees, etc.) can I expect?

With Adjustable Rate Mortgages:

What do you use to determine how often and by how much the interest rate will increase or decrease?
Is there a limit on the amount of increase or decrease during a specified period of time?
Are there ways that I can keep interest payments level in the early years of my mortgage?
What are the potential penalties in the later years if I take advantage of these benefits?

Lock In Your Rate!

Get a rate lock in writing. A rate lock guarantees your interest rate and terms for a given period. Lock in all the costs you can, the interest rate, and points. Set the lock ''on application'' rather than ''on approval.'' This means your rate won’t change while you are waiting for the loan application to be approved.
When you shop for a mortgage ask about the terms of the lock contract and the cost. Both can vary.
Your lock-in period should be long enough to allow for settlement, contingencies imposed by the lender and other factors that might delay the process. Consider anything that could delay your settlement, including the time it will take you to gather and submit your own paperwork.
Most lock periods are for 15 to 60 days. Ask your lender to estimate (in writing, if possible) the average time for processing loans. Once you lock in a rate, make sure your loan is approved and closed before the rate lock expires.