Shopping 101 (Continued)
Last month I promised to elaborate on what you should be looking for when you need a mortgage. Here are the seven areas to be aware of as you begin to look for the right mortgage consultant: rates, programs, fees, education, financial planning, service and trust.
Rates: The important thing to understand about rates is that there is not just one rate for any given program. Rates are a function of the points that you pay. This means that you may choose to pay extra points to get a lower rate, or (and this is a big deal) you may choose to take a higher rate and reduce or eliminate points altogether. You should have a choice. It says a lot about your mortgage loan officer if rates are forced in lieu of choices being offered.
Programs: Almost every lender can offer virtually every type of financing. Almost. There are slight differences among similar programs. You will probably come to learn that brokers will be able to offer a wider variety of loans than bankers because brokers offer products from many different banks, whereas each banker is limited to their own product line. The key to “programs” is that you, as the borrower, must make sure to fully understand the program. A good consultant will make sure you understand. Be wary of “salespeople” offering you programs before they fully listen to your needs. Find a consultant, not a salesperson.
Fees: When buying a home, there is the potential for you to be exposed to five distinct categories of “funds to close escrow.” You must know about and fully understand these five categories before you can effectively compare lenders. Here are the categories:
1. Down Payment – This is typically your choice. You can put down anywhere from zero percent up to 100 percent (pay cash). Although the choice is yours in most cases, many programs do require 5 percent down. In preparing to buy a home, try to save at least 5 percent down because rates are better if you have your own money invested. The best rates come when you have at least 20 percent down.
2. Points – As discussed under the “Rates” section of this article, points are fees that you can pay to buy your rate down below the market. Each point equals 1 percent of the loan amount.
3. Origination Fee – An origination fee is the same as a point. In our industry, the first point is called an origination fee and all other points are called points. The reason for this is that the “par” rate that the industry uses is the rate that assumes 1 percent origination fee. You can pay extra points to get a rate below “par” or you can reduce or eliminate the origination fee if you accept a rate that is above “par.”
4. Closing Costs – Often consumers confuse this category with “funds needed to close escrow.” As you can see, closing costs are only part of the total funds you’ll need. Closing costs are the fees you pay to all the people or companies involved in helping you close escrow, such as the appraiser, credit reporting agency, title insurer, escrow company, lender, county recorder, couriers, etc.
5. Prepaids and Impounds – These are not really costs associated with obtaining the loan, but rather they are costs associated with owning a home. This consists of property taxes, homeowners insurance, and prepaid interest. Like many of the other categories in this list, you have a lot of control over some of these costs. You can shop for homeowners insurance just like you shop for auto insurance. You can also minimize prepaid interest by closing near the end of the month.
Education: If you fully comprehend the loan program, the fees, the rates, and how they all tie together, you’ve probably found a good loan consultant. If not, you may just have another “salesperson.” Be aware.
Financial Planning: Try and think of your mortgage in terms of your overall financial picture. Is your mortgage just a tool to help you buy a home, or can it be structured in a manner that helps you retire early and make you wealthier as part of a complete financial plan? Your consultant should be able to not only advise you in regards to this, but also recommend a good financial planner that will help you create and implement a plan for your future.
Services: Is this just an industry buzzword? Or could bad service actually lose you thousands of dollars? The answer is that service is extremely important in this industry. Service is the ability for a lender to communicate with all parties in the transaction (appraiser, listing agent, selling agent, buyer, title company, etc.) in order to keep everyone aware of what needs to be done to get the loan closed on time. Why is this important, you might ask? Well, it’s important because there are usually many people involved who are planning their lives around that transaction closing on time. Moving vans are lined up. Painters, carpeting companies, etc. Also, the seller probably can’t close on their new home until this deal closes. That would have a domino effect that affects two, three or four families and all of the contractors they have lined up. But the most important reason to close on time is because, if you do not, you are in breach of contract and the seller can cancel the contract and keep your earnest money. You could be out thousands of dollars with nothing to show for it. Service is extremely important. Many clients have indicated that it is very difficult to get this kind of service from an online order-taker.
Trust: How did you find your mortgage company? Was it someone you heard on the radio? Was it a “too good to be true” offer you received in the mail? A billboard? Companies that advertise to the general public are typically in the business of selling, not necessarily consulting. Do you want to be sold something? Or … was your lender recommended to you enthusiastically by someone you trust? One of the best sources for finding a good lender is to ask your realtor. Professional realtors will surround themselves with other professional people who can help them offer the best products and services to their clients.
You deserve to have the best combination of rates, programs, fees, education, financial planning, services, and trust in your Lender. It may be worth your while many times over to take your time seeking out and finding a good, professionally lender.
Until next time, keep on keepin’ on!