Finding The Best Lender

To get a jump-start on the mortgage loan process, use these five tips to find the best lender for you.

1. GET YOUR CREDIT SCORE IN SHAPE

Not everyone can qualify to buy a home; you have to meet certain credit and income criteria to assure mortgage companies you can repay your loan.

A low credit score signals that lending to you is risky, which means a higher interest rate on your home loan. The higher your credit score and the more on-time payments you make, the more power you’ll have to negotiate for better rates with potential lenders. Generally, if you have a score under 580, you’ll have a tough time qualifying for most types of mortgages.

To build your credit score, first make sure your credit reports are accurate and free of errors. Get your report from the three major credit bureaus: Equifax, Experian and TransUnion. Each is required to provide you with a free copy of your report once every 12 months.

Next, try to pay off high-interest debts and lower your overall level of debt as quickly as possible. By lowering your debt, you’ll improve your debt-to-income ratio. Paying off credit cards and recurring loans before you buy a home will also free up more money for the down payment.

2. KNOW THE LENDING LANDSCAPE

It’s difficult to discern who the best mortgage lenders are in a crowded field. Here are the most common types of lenders you’ll choose from:

  • Credit unions: These member-owned financial institutions often offer favorable interest rates to shareholders. And many have eased membership restrictions, so it’s likely you can find one to join.
  • Mortgage bankers: Bankers who work for a specific financial institution and package loans for consideration by the bank’s underwriters.
  • Correspondent lenders: Correspondent lenders are often local mortgage loan companies that have the resources to make your loan, but rely instead on a pipeline of other lenders, such as Wells Fargo and Chase, to whom they immediately sell your loan.
  • Savings and loans: Once the bedrock of home lending, S&Ls are now a bit hard to find. But these smaller financial institutions are often very community-oriented and worth seeking out.
  • Mutual savings banks: Another type of thrift institution, like savings and loans, mutual savings banks are locally focused and often competitive.

You can, and should, check if each lender you consider is registered in the state you’re shopping in through the Nationwide Multistate Licensing System Registry. Also, search the Better Business Bureau for unbiased reviews and information.

3. COMPARE RATES FROM SEVERAL MORTGAGE LENDERS

This is where homework and a lot of patience come into play. As noted, there are all kinds of mortgage lenders — neighborhood banks, big commercial banks, credit unions and online mortgage lenders. You have more options than ever.

You can search for the best mortgage rates online to start. Keep in mind that the rate quote you see online is a starting point; a lender or broker will have to pull your credit information and process a loan application to provide an accurate rate, which you can then lock in if you’re satisfied with the product.

Once you have several quotes in hand, compare costs and decide which one makes the most financial sense for you. Use your research as leverage to negotiate for the best mortgage rates possible.

While there’s more to finding a good lender than picking the lowest rate, that doesn’t mean it isn’t important. The total interest you pay on over the life of the loan is a big figure, and a low rate can save you thousands of dollars.

4. ASK THE RIGHT QUESTIONS

Picking the right lender or broker to work with can be tricky. Narrow your choices by asking for referrals from friends, family or your real estate agent, or by reading online reviews. Once you have some names, it’s time to ask:

  • How do you prefer to communicate with clients — email, text, phone calls or in person? How quickly do you respond to messages?
  • How long are your turnaround times on preapproval, appraisal and closing?
  • What lender fees will I be responsible for at closing? (Fees may include commission, loan origination, points, appraisal, credit report, and application fees.)
  • Will you waive any of these fees or roll them into my mortgage?
  • What are the down payment requirements?

Note: If you’re looking for low down-payment options, a loan backed by the Federal Housing Administration, Veterans Affairs or Department of Agriculture might be your best bets.

Also, check with your mortgage lender or broker if buying points to lower your rate makes sense. With this strategy, you’re basically paying some interest upfront in exchange for a lower rate on your mortgage. Generally, one point equals 1% of the loan amount. For example, on a $200,000 mortgage, 1 point would cost $2,000 and could lower your interest rate by 0.25%.

This might be a good cost-saving move if you plan on living in the home for a long time. “Even though you pay additional points upfront to do so, you can save thousands of dollars in interest expense over the life of your loan,” says James Dowd, a San Francisco-based financial advisor and accountant.

5. READ THE FINE PRINT

Principal and interest payments on a mortgage aren’t the only costs of homeownership; you should ask your lender about other costs such as estimated clos

ing costs, points, loan origination fees and transaction fees — and ask what each fee includes. If you are unsure of something, ask the lender for an explanation.

Some mortgage lenders will require an “earnest money” deposit to start the loan process. However, be wary of contracts specifying that the earnest money will be kept regardless of whether the lender offers a loan or the loan closes, says Kevin Stophel, a financial planner and advisor in Chattanooga, Tennessee. Ask the lender to specify under what circumstances the earnest money will be kept, and if the answer is vague, keep shopping around.

Don’t forget to examine the fine print of your loan documents, particularly the initial Loan Estimate and the Closing Disclosure. These will tell you the exact finance terms, who pays closing costs, what items are and aren’t included in the home, whether there’s a home inspection contingency, the closing date, and other important details.

Mortgage Brokers

A Mortgage broker works as an independent unit who offers to provide multiple financing options to the home buyers and homeowners with a variety in lenders. Talking about the mortgage loans that are available on buying your own home, the broker works as an immediate intermediary between the mortgage borrower and mortgage lender. However, the broker does not use his own funds to originate mortgages.

After a borrower contacts mortgage broker and the broker agrees to work for him, the broker starts collecting information regarding the mortgage option available for the borrower. There are some important documents that are important to have for a borrower in order to obtain the finance. These documents includes – Income, asset, and employment documentation and the credit report. All these documents are required by a retail bank to offer the finance.

Once the broker obtain all the documents from the borrower, it is time to determine what will work best in the interest of borrower. It is may includes setting an appropriate loan amount, loan-to-value and determining which loan type would be ideal for the borrower. however, borrower can decide on all on their own, broker is just to offer help.

After collecting all the details regarding what is good for the borrower, the broker submits the loan to a lender they work with, to gain the approval. During the whole loan process, the broker will remain in communication with both bank and the borrower to make sure that everything works out well.

Mortgage brokers earn through charging the loan origination fee or to put it in simple works it the broker fee. They can also offer no cost loans by utilizing a lender credit, which will effectively raise the borrower’s interest rate, but eliminate the extra costs. Whatever a mortgage broker charges may vary largely thus make sure that whomever you choose is the one that fits in your pocket!

Home Equity Loan & Line of Credit

If you’ve owned your home for a while or have seen its value rise significantly, you may be thinking about taking out a loan against the equity, perhaps for home improvements, a new car, or some other purpose. You have two basic choices: a home equity loan or a home equity line of credit (HELOC).

What Is a Home Equity Loan?

A home equity loan is a lump sum loan that uses your house as collateral, just like your primary mortgage. With a home equity loan, you borrow against the value of your home decreased by the existing mortgage (the equity).

How much can you borrow? Most lenders won’t allow you to borrow more than 75% to 80% of the home’s total value, after factoring in your primary mortgage. However, even if you put no money down when you bought your house and haven’t paid a dime of principal back, any increased market value of your home may make a home equity loan feasible. For example, say you bought your house 12 years ago for $150,000 and it’s now worth $225,000. Even if you haven’t paid off any principal, you might qualify for a home equity loan of $30,000 — this would bring your total loan amount to $180,000, which is 80% of your home’s value of $225,000.

Interest rates on home equity loans. A home equity loan is sometimes called a “second mortgage” because if you default and your house goes into foreclosure, the lender is second in line to be paid from the proceeds of the sale of your house, after the primary mortgage holder. Because the risk of not getting paid the full value of the loan is slightly higher for the second lender, interest rates on home equity loans are usually higher than those on primary mortgages. But at least the interest is lower than on the typical credit card.

Loan term.  The loan term of a home equity loan is usually much shorter than that on a primary mortgage — ten to 15 years is common. That means that your monthly payments will be proportionally higher, but you’ll pay less interest overall.

What Is a Home Equity Line of Credit?

The other major option in home equity borrowing is a home equity line of credit, or HELOC. A HELOC is a form of revolving credit, kind of like a credit card — you get an account with a certain maximum and, over a certain amount of time (called a “draw period”), you can draw on that maximum as you need cash.

The draw period is usually five to ten years, during which you pay interest only on the money you borrow. At the end of the draw period, you’ll begin paying back the loan principal. Your repayment period will usually be in the ten- to 20-year range, which means that, as with a home equity loan, you’ll pay less interest than you would on a traditional 30-year fixed mortgage, but your monthly payments will be proportionally higher. HELOCs sometimes have annual maintenance fees, which generally range between $15 to $75, and many have cancellation fees that can be several hundred dollars.

Similar to home equity loans, the amount of money you can borrow with a HELOC is based on the amount of equity you have. Usually that means you will be able to borrow some percentage of the home’s value, reduced by the existing mortgage — usually 75% to 80%. Unlike home equity loans, the interest rate on a HELOC is usually variable, so it can start low but climb much higher. HELOC interest rates are usually tied to the prime rate, reported in The Wall Street Journal, and the maximum rates are often very high — similar to the rates on a credit card.

What Can You Do With a Home Equity Loan or HELOC?

You can do whatever you want with a home equity loan or HELOC: finance your son’s education, take an extravagant trip, or buy a big screen television. Some people use it to consolidate debts that they’ve racked up on various credit cards.

However, the most prudent way to spend the cash is on improving your home. If you aren’t able to pay the loan back, you risk foreclosure, but if you used the cash to improve your home, you should see an increase in its value (if you followed the advice in Nolo’s article Do Home Improvements Really Add Value?). This gives you the option to refinance if you need to and, if the value of your home has gone up, you’ll be more likely to qualify for the loan. (For more information on how refinancing can lower your monthly payment, see Nolo’s article Refinancing Your Mortgage: When It Makes Sense.)

HELOCs work well if you are making improvements on your home and have ongoing expenses. Often borrowers get them as an added safety net, in case they need cash suddenly, but without real plans to draw on them otherwise.

You may just want to have this source of cash in your back pocket for emergencies — but make sure there’s no requirement that you draw some amount, as some lenders require this so that they’re assured of making a little money on the deal.

Tax Benefits to Home Equity Loans and HELOCs

A final benefit to using a home equity loan or HELOC to improve (or even purchase) your home is that the interest is tax deductible, just as it is on a primary mortgage, up to $1 million. You can deduct only up to $100,000 if you use the money for another purpose. (However, you can’t deduct more than the house’s fair market value.)

Also be careful if you’re subject to the Alternative Minimum Tax. In that case, your home equity loan or HELOC may be deductible only if it is used to purchase or improve the home.

How to Get a Home Equity Loan or HELOC

Shopping for a home equity loan or HELOC is just like shopping for a primary mortgage. You can either go to a mortgage broker or you can research loan options on your own. For more information on shopping for a mortgage, read Nolo’s article Where to Shop for a Mortgage.

With a home equity loan, expect to pay some of the typical fees you paid on a regular mortgage, but in much lesser amounts. (Some of these fees are based on the loan amount, which is probably lower than your primary mortgage.) At the very least, you’ll have to pay for an appraisal, which is the lender’s opportunity to evaluate how much your home is worth. You may find a home equity loan without any fees, but be careful: Usually it means these costs are rolled into the loan, perhaps in the form of a higher interest rate. Costs on HELOCs are usually (but variable interest rates mean the interest payments can be much higher).

Refinance

What is Refinance

A refinance occurs when a business or person revises a payment schedule for repaying debt. Mechanically, the old loan is paid off and replaced with a new loan offering different terms. When a company refinances, it typically extends the maturity date. Companies or individuals refinancing loans may have to pay a penalty or fee.

BREAKING DOWN Refinance

The most common forms of consumer debt are mortgages, car loans and student loans. The borrower agrees to make certain payments based on a rate of interest. Companies operate the same way. The most common types of corporate loans are term loans, bonds and lines of credit. The company agrees to the terms of each loan type, and the bank lends it money. Terms provide the details of the loan and specify the interest rate, payment amount and payment date(s).

When the terms of the loan are revised in a way that changes the payments associated with the loan, the loan has been refinanced. In a refinanced loan, the old loan is paid off with the new loan, and the old terms are replaced with new terms. Some loan terms come with fees associated with prepaying, which makes refinancing less rewarding. The most common changes in loan terms are maturity date and interest rate.

Why Refinance

Borrowers refinance for myriad reasons. A common goal is to pay less interest over the life of the loan. Borrowers may also want to change the duration of the loan or switch from a fixed-rate to an adjustable-rate mortgage, or vice versa. The reasons and motivations behind refinancing a loan are as varied as the loan types offered.

Refinance Loan Types

There are several different types of refinancing options. The type of loan a borrower decides on is dependent on the needs of the borrower. The most common type of refinancing is called the rate-and-term. This occurs when the original loan is paid and replaced with a new loan. Another type of refinancing is the cash-out. Cash-outs are common when the underlying asset collateralizing the loan increases in value. The transaction involves withdrawing the value or equity in the asset in exchange for a higher amount. In other words, when an asset increases in value on paper, you can gain access to that value with a loan rather than selling it. This option increases the total loan amount but gives the borrower access to cash immediately while still maintaining ownership of the asset. Another refinancing option is referred to as the cash-in. The cash-in refinance allows the borrower to pay down the loan for a lower loan-to-value ratio or smaller loan payments.

 

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