I. Overview of Topic
Today the home mortgage market is tight - if fact, worse than tight, it's in the midst of a serious shakeup, especially the subprime market. So getting the mortgage you want and need these days can be quite a challenge. This makes it all the more important for you to get good online mortgage advice before diving in. Can such a topic as complicated as home mortgages be overviewed in just ten minutes? I think so - we'll see.
I don't need to tell you all mortgages are not created equal. And I hope I don't need to tell you that a half or quarter point difference in the interest rate you pay on a mortgage can be worth tens of thousands of dollars over the 30 years you pay it off. Or that the type of home mortgage you accept - fixed, adjustable or balloon - may well determine whether you are able to keep your home or lose it to foreclosure in coming years. So this is a very important decision and you ought to approach it cautiously and with a determination to look at all options. The Internet can be a great help in providing this type of online mortgage advice as I'll discuss below.
Types of Mortgages
Although lenders can cook up all sorts of different mortgages in terms of the details, there are really only two main types you need to be concerned with, namely fixed interest rate and adjustable or variable interest rate.
Fixed interest rate mortgages are nearly always your best bet. No matter what happens in the general economy, even if interest rates go up substantially, your monthly payment stays the same. Of course, if interest rates fall quite a bit, you may later decide to refinance (see our WebSearchGuides report on refinancing.)
In contrast, an adjustable rate mortgage (ARM) is unpredictable as a bouncing football. With every uptick or downtick of interest rates you monthly payments may fluctuate. It's easy to see how so many people have gotten in trouble with ARMs over the past couple years. As interest rates have risen, their monthly payments have swollen to unmanageable amounts. So what was the attraction to risky ARMs in the first place? The answer is apparent interest rate savings. For the first couple years or so, the ARM is cheaper. After that, anything can happen and, in 2006 and 2007, it did, and foreclosures skyrocketed in the U.S.
But what if you plan to sell your house in a few years? Yes, in this case an ARM may make good financial sense - most online mortgage advice experts say that if you plan to maintain your home mortgage less than six years or so, an ARM may well be a good choice, if the adjustable rate mortgage guarantees a low interest rate for at least several years.
However you might also consider a hybrid mortgage, which has features of both fixed and adjustable rate loans. A hybrid mortgage might, for example guarantee a low initial rate for four years and then adjust it once a year thereafter. This type of loan makes good sense if you are sure you'll be relocating within, say, ten years and want reasonable stability in your monthly payments for all or most of that time. You'll pay a somewhat higher rate for this than for an ARM, of course. (In the home mortgage market, you can be sure absolutely nothing is free, ever.)
How Do Points Work Exactly?
Points are tricky because some lenders use them to disguise the real cost of your mortgage. Sometimes you'll see an ad for mortgages at what seems like an amazingly low interest rate. Better be careful, those low-interest loans probably carry a lot of points. (They also are probably aimed only at the most credit-worthy applicants.)
Points are the in-advance fees you pay when you close your loan. They're expressed in percentages. A point is 1 percent of the amount of the loan, so on a $200,000 loan, one point is $2,000.
Basically this is interest on your loan before you get the loan. Lenders love points.
Just remember that the more points you pay, the lower the interest rate on the loan should be. Points and interest should always move in opposite directions.
However paying points is not necessarily bad - points lower, or should lower, your monthly payments.
Suppose a lender quotes you 6.75 percent on a 30-year fixed-rate loan with one point, is that better or worse than another lender's quote of 7.0 percent with no points? With the lower interest rate (6.75 percent) you will have lower monthly payments for 30 years, true, but what if you plan to sell your house in a few years? If you take the 6.75 percent loan plus one point, it will take you approximately four years to earn back the point (0.25% a year). But if you stay in the house longer than four years, it's a better deal than the 7.0 percent loan with no points.
You need to do the arithmetic - given your own plans - to determine whether paying points is a good deal or not on a fixed-rate mortgage.
To make things easy, experts advise that you request interest rate quotes from several lenders with the same number of points - e.g., ask for quotes with 1 point from two or three different lenders for a 30-year fixed-rate mortgage. This way you don't have to do any arithmetic at all. You can directly compare the rates.
Typical lender fees include application and processing fees (usually a few hundred dollars), a credit report fee, an appraisal fee, and title and escrow charges. You should ask the lender to itemize these fees before making a formal application. Since these fees may vary from lender to lender, you should factor them in when deciding which lender or lenders to seriously consider.
More Online Mortgage Advice: Tips About Completing Applications
- Make your lender aware of any credit problems you have before applying for the loan. There's no point in paying application fees if the loan won't be approved.
- Never agree to a loan that carries prepayment penalties. Down the road you may want to refinance if interest rates decline. Make sure now you don't sign a home mortgage agreement committing you to 2 or 3 percent prepayment penalties.
- Balloon loans - which have low payments for a period of years, then become due in full - are highly dangerous to your financial health. What if you lose your job or have a health emergency during the interim period? Experts advise you to avoid balloon loans in virtually all cases.
- Loans with negative amortization are something else to scrupulously avoid. These are ARM loans in which your outstanding loan may grow even though you make your agreed-upon monthly payment. This will happen, for example, if interest rates go up substantially. Then your monthly payment no longer covers principle + interest, only interest, and your amount due keeps going up. Lenders in today's market sometimes offer these types of loans to applicants considered "subprime." But they are highly risky loans and should be avoided.
- You should plan on putting at least 20% down on your house in order to qualify for favorable mortgage terms and avoid the additional cost of private home mortgage insurance. (Private home mortgage insurance is imposed by lenders who feel there's a significant possibility of default on the loan.)
- Which is better, a 15-year or a 30-year mortgage? Somewhat surprisingly, nearly all online mortgage advice experts advise taking out a 30-year mortgage. Payments are lower on a 30-year loan and you can probably find a better (higher-return) use for the money you save than putting it into paying off a mortgage. Why lock yourself into an expensive 15-year mortgage? If you want to pay off your mortgage in half the time, say the experts, just make double payments each month on your 30-year loan. Better yet, put the extra money in an IRA or in a savings account for your kids' education.
- It's a good idea to get prequalified or preapproved before shopping for a mortgage. Prequalified means you've found a lender who knows your financial situation and have indicated they are willing to make you a loan. Preapproved means the lender has formally reviewed your financials and has indicated approval. Neither status is legally binding but either can be useful in negotiating with a seller.
Searching for the Best Mortgage
On the Internet you'll find hundreds of mortgage lenders. Below, I suggest several of the larger ones which I've checked out and found reputable. Or, you may prefer to deal with a local lender in your area. You can probably find many advertising in the real estate section of your local newspaper, especially on Sunday. However, be careful not to get suckered in by lenders promising low rates or "no points" loans. And remember, all those big newspaper ads are being paid for by higher rates on the loans being placed by those companies.
For a reliable Lender Directory in your area visit the HSH Associates website. (It also features a variety of useful calculators, like an Afford ability Calculator, a Mortgage Qualification Calculator, and an Amortization Calculator).
Another possibility often suggested by online mortgage advice experts is to use a mortgage broker, who will do your searching for you. Mortgage brokers usually add about 0.5% to the loan amount (though you may be able to negotiate a lower percentage). A broker can help you get a good deal and also can help you deal with the tedious and confusing paperwork involved in getting a loan. If you have had some credit problems in the past, a broker may be able to find you a lender you wouldn't otherwise find yourself.
However, never accept a broker's offer without finding out who the lender is and then checking with the lender to make sure the interest rate and points are exactly what the broker has quoted you.
That's it - our ten minutes are up! (OK, maybe twelve or thirteen). Below is a listing of Web resources to help you
continue your research on online mortgage advice.
II. For Additional Research
This Section provides reviews and recommendations of Web sites and other
E-LOAN, Inc., a leading online provider of consumer loans, offers home mortgage loans and debt management services online. E-LOAN has reengineered the consumer loan process by offering a broad choice of products from many lenders for mortgages, home equity loans, and auto loans in a secure online environment, combined with comprehensive personal service from professional loan consultants. (E-Loan is a good starting point in your mortgage search process, and everything can be done online.
CitiBank home equity loans are among the most competitive in the industry and they do not charge the borrower closing costs, points or application fees. Citibank is one of the first banks to offer a 30 year fixed rate home equity loan into market. This, says a company online mortgage advice representative, "means lower payments for the customers per month and in the rising rate environment". The products Citibank offers are variable rate Home Equity Line of Credit, a 20 year fixed rate Home Equity Loan or a 30 year fixed rate Home Equity Loan.
WOWquote provides up to three qualified, reputable referrals to home mortgage lenders in your area. No fees or obligation.