Monday, January 23, 2006

Financing Tips

by Osman Parvez


With the increasing mortgage competition, I've seen some questionable advertising aimed at home buyers. Time for a couple of tips...

1. If it sounds too good to be true, it probably is. There are many potential lenders out there and competition is fierce. Some are touting unbelievable deals. Read the fine print. Get referrals and references.

2. Mortgages are becoming commodity products but the service you get from a mortgage lender isn't. Shop around for rates and consider the full costs involved, not just the teaser rate advertised. Make sure you get a good faith estimate and that you fully understand it.

3. Get yourself ready ahead of time. Before you contact a lender, gather your financial records. You'll need paycheck stubs, your tax returns for the previous few years, social security numbers, and bank account records. Make copies and create a file. When you are ready to pull the trigger, shop lenders within a short period to limit the impact credit checks can have on your credit rating.

4. Most importantly, know your terminology. Here's a couple of important definitions/concepts.

What's a discount point?
Points are FEES that you will pay to the lender. Sometimes, these fees can be rolled into the principal value of the loan. Each point equals 1% of the purchase price. So for example, if you are buying a $325,000 home, one point equals $3,250. Sometimes lenders will also call points "loan origination," "discount," or "buy fees" fees. Usually the more points, the lower the interest rate.

Smartmoney.com has a useful worksheet for helping you decide whether you should pay points or not on your upcoming home loan.

What is the difference between APR and Rate?
To make it easier to compare rates, the government requires lenders of all types to calculate the cost to borrow as an annual percentage rate (APR). In theory, this lets a buyer compare apples to apples. APR is useful because it should include a number of things that affect the cost of the loan including origination fees, points, mortgage insurance premiums, prepaid interest and other items. For more details, here's a good article explaining APR. Unfortunately, lenders don't always calculate APR the same way and APR for a 15 year loan may be calculated differently from a 30 year loan, as another article helpfully explains.

What's the difference between an adjustable rate, fixed rate, and interest only mortgage?
In a nutshell, different loans fit different needs. Each loan product has pluses and minuses and you should choose a mortgage that fits you best.

Monthly payment is not the only factor you should consider. How long do you plan to stay in the home? How secure is your income stream? How comfortable are you assuming risk in changing interest rates.

If rates stay low, you could have saved big money with an adjustable. If rates spike, you may have been smart to pay a bit more now but save later by choosing a fixed rate mortgage. If you are taking time off to go back to school, or expect another short term disruption of your income stream, an interest/only mortgage might be a good fit.

Smartmoney has nice writeup that should get you moving in the right direction.

And here's a couple of good places to compare rates:

BankRate.Com
HSH Associates
Denver Post

Contact us for our list of recommended lenders.


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The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties.   We strongly recommend conducting rigorous due diligence and obtaining professional advice before buying or selling real estate. 

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