There are a lot of misconceptions about mortgages. New rules effective this month, from the Consumer Financial Protection Bureau , require unprecedented transparency in every application. But before you even get to the point of applying, here are five mortgage facts you should know…
Mortgages cost more than interest
There are numerous fees charged to process a home loan including origination fees, closing costs, underwriting fees, mortgage insurance and points. A better way to compare what lenders offer is to look at the annual percentage rate (APR). That’s the figure by which you should gauge the true cost of a loan. Too often banks might entice you with a low interest rate and tack on so many fees that the APR is higher, so add up the total cost of a home loan before you commit.
Mortgage rates can be volatile
They fluctuate during the day and from week to week. Once you’ve been approved for a loan and sign the agreement, those rates are usually locked in for 30-60 days so that the paperwork can be processed.
As of this writing, after five of six days of stock market losses, the average mortgage interest rate on a 30-year fixed home loan has dropped to 4.26 percent. Last week, it averaged 4.41 percent; monthly payments would have been $1,504.06. This week they would be $1,477.56. It doesn’t sound like a big difference, but, over the course of the loan, you would have paid an extra $9,540.00 if you had bought last week.
If you see the rate oscillating quite a bit across several days or weeks, you can ask for a float down provision. If rates go up, you won’t have to pay more, but if they drop you can take advantage of the lower interest rate. Just be aware that there will be a fee for adding this clause to your agreement.
Mortgage rates and other costs vary by lender
The CFPB does not require banks or other mortgage lenders charge uniform rates for any part of the mortgage process, whether it is interest, title insurance or appraisals. The only requirement is that lenders are clear about what they charge. Comparison shopping is the best way to get the best price on the total mortgage package. Be sure to go with established banks or credit unions when you compare.
When you do finally agree to a mortgage, be certain the terms are what you initially agreed to. Some unscrupulous mortgage lenders have been known to present enticing rates only to jack up costs on signing. Some borrowers simply agree to the less favorable terms because they’re concerned they won’t get funded elsewhere.
No- and low-down-payment loans still available
The best mortgage rates are for borrowers with FICO scores of 740 and above who make down payments of 20 percent or more. For a first time home buyer, it’s tough to save that much, especially in high-cost areas like Southern California (where the median home price is now $385,000).
Just to get an average home, a borrower would have to part with $77,000 in cash, not easy in Los Angeles where the median family income is just over $54,000. There are other options including home loans from the Veteran’s Administration (VA) and the Department of Agriculture (DA), which both offer no-money-down loans to those who qualify. The Federal Housing Administration (FHA) provides loan guarantees to lenders who offer home loan to borrowers at as little as 3.5 percent down.
You might be able to refinance
One out of five mortgagors are still underwater. Until the government intervened, it was impossible for homeowners who owed more than their house was worth to refinance and get a better mortgage interest rate. You needed a loan to value (LTV) of at least 80 percent, meaning a minimum of 20 percent equity in your home. Far too many people bought property at the peak of the housing boom with interest rates pushing 7 percent, only to watch the market crash and burn. By December 31, 2008, there were 3 million foreclosures.
With the federal Home Affordable Refinance Program (HARP), if you meet specific criteria, your underwater loan (a loan which has gone under its book value) may be eligible for refinancing, so that you can take advantage of lower interest rates and cut your mortgage payments. Borrowers who are qualified will be allowed to refinance a loan that is as high as 125 percent of a home’s value. Not every mortgage qualifies: You can’t have missed any payments in the previous 12 months and either Freddie Mac or Fannie Mae or must own the loan. To see if they do, you can go to their websites and enter your loan details. You can find more information about HARP on the federal Making Home Affordable website.
Another program, the Federal Housing Administration (FHA) Streamline Refinance, has been modified to help homeowners with loans the FHA insures. It lets a borrower refinance without verifying income and assets. It allows for an unlimited LTV, so if you are FHA-insured, and severely underwater, you still may be able to benefit from this program. Both options could help borrowers lower their payments and stay in their homes.
There are far more than five mortgage facts you should know. If you need more information, you can get free or low-cost advice from the U.S. Department of Urban Development (HUD) approved counseling agencies. Remember not to sign any documents until you fully understand them.