What’s the best advice for people who are buying or refinancing a home? Get the best mortgage. According to the Texas Society of CPAs, shopping around for the best mortgage deal you can find and being informed about the right questions to ask mortgage lenders can be the most important things that you do.
GET THE FACTS ABOUT RATES
The mortgage interest rate will affect your monthly payment amount, so as a general rule you will want to find the lowest interest rate possible. Be sure to ask, however, whether the lender is offering a fixed-rate loan or an adjustable-rate mortgage.
With a fixed rate loan, the interest rate will remain the same as long as you hold the mortgage. With an adjustable-rate loan, the rate can change based on the direction of interest rates in the credit markets. Adjustable-rate mortgages, also known as ARMs, often offer low initial interest rates, but those rates can rise down the road, which means your monthly payment will increase. When considering ARMs, it’s important to find out how often the rate can change and by how much, as well as all other details that will affect your payments. If you select an ARM, CPAs advise that you determine that you can afford the mortgage not only right now, but also in the future.
UNDERSTAND THE TERMS
While interest rates will have a direct impact on your monthly payments, there are other important details to understand about mortgages, as well. Ask, for example, about the minimum down payment that the lender requires. The loan term is another important factor. The number of years you have to pay the loan will affect your monthly payments. See if there are any pre-payment penalties. There are huge savings by making extra mortgage payments starting as early as possible. Even an extra $100 per month can take years of mortgage payments on the back end of the loan term.
WHAT FEES ARE INVOLVED?
Lenders usually charge fees for their mortgages. For example, most loans include points, which are typically based on a percentage of the loan amount. If you are charged two points on a $200,000 mortgage, say, that would amount to $4,000, or 2% of the loan amount. Typically, a loan with a higher interest rate will charge fewer points. There may be other expenses associated with the loan, as well, such as broker or underwriting fees. Be sure to ask about any additional expenses and then calculate how they will affect your up-front costs or your monthly payments.
DON’T BE AFRAID TO NEGOTIATE
Now that you’ve learned about all the loan details, remember that you can ask for better terms on any of those factors. It’s perfectly acceptable to find out if the lender would be willing to lower the points or other fees or even the interest rate. Make sure, however, that a drop in one fee isn’t accompanied by an increase in another.
DO YOU NEED PMI?
One of the negotiable elements in buying a home is how much money you will offer for your down payment. Many lenders require that you put down 20% of the home sale price as your down payment. If you’re allowed to make a smaller down payment, the lender will likely require that you buy private mortgage insurance or PMI. If you are unable to keep up your mortgage payments, this insurance covers the lender’s costs. If you do need PMI to qualify for your loan, find out what the overall cost of the PMI will be and how long you will have to hold this insurance.
If you do not have a 20% down payment, consider two mortgages: one for 80% of the house price and a second one for the balance. That way you avoid the PMI. The second mortgage is usually at a higher interest rate so you have to weigh that against the PMI premium costs.
There are clearly many questions to be asked when you go shopping for a home mortgage. Your local CPA can help you understand them and advise you on the best mortgage options in your situation. Call on him or her for advice on any of your financial needs.
Copyright, American Institute of Certified Public Accountants