Mortgage interest rates are sinking toward all-time lows! That headline should be shouting happy news to home buyers and the housing market. Instead, a consumer watchdog agency warns that we may not be maxing out the potential benefit of this buyer’s, or make that, borrower’s market.
A report on the mortgage experience by the Consumer Financial Protection Bureau (CFPB) found that borrowers aren’t shopping around for the best mortgage deals available and many feel simply overwhelmed by the mortgage application and approval process.
The answer would seem to be obvious: information and education. And that’s what MyBankTracker is about. Let me offer a few helpful pointers based on personal experience:
Make sure you’re ready to buy
Because buying a home is probably the biggest financial investment any of us will ever make, you need to know if this is the right time for you to get into the housing market. Answering a couple of questions can help you decide.
Even if the numbers say you’re ready, buying a home isn’t always the best decision. There are benefits to being a homeowner such as tax deductions and building equity. But there are also potential disadvantages you should consider — like coming up with the money for a down payment and managing the mortgage payment as well as all of the associated monthly expenses.
If you’ve always been a renter, you may take for granted the freedom renting allows you. Once you’re committed to a home and a mortgage, there won’t be an option to simply move on after giving a month’s notice.
In financing a home purchase, what you can afford depends on your debt-to-income ratio — at least as far as lenders are concerned. They don’t want your total debt to be more than 36 percent of your gross monthly income. This percentage includes your mortgage payment and any credit cards, car loans, student loans or other debt you currently have.
Even if you have a favorable debt-to-income ratio, the question is, how much debt you are willing to live with? The risky approach is to pay more each month for a more expensive home and hope for enough appreciation to make the risk worthwhile. The safer approach is a less expensive home with more manageable mortgage payments, less overall debt, but smaller potential appreciation.
Another factor in affordability is your tax bill. You’ll be devoting more of your monthly salary to housing, but you’ll also get a tax break. A rough rule of thumb is to figure that your combined savings on income taxes (which you won’t get back until the following year) will probably offset your new expenses for property taxes, home insurance and modest HOA fees.
In other words, if your mortgage payment alone is about the same as your current rent payment — your tax break will likely cover your added housing expenses, depending on your bracket. Keep in mind though that tax breaks do come and go as the political winds change.
As the CFPB mortgage report recommends, use our calculator to estimate how much house can you afford.
Get offers from several lenders
Before committing to a mortgage, you should examine the true costs of each type of loan. To determine which loan is better, you have to evaluate each loan, not just for the next five years, but for 10 and 20 years from now.
An Adjustable Rate Mortgage (ARM) loan with a low initial monthly payment may hurt you in five or seven years from now. And a loan with a higher interest rate may actually save you money if you keep it for a few years. Points and margins can also make a loan a better fit. These comparisons are essential in choosing the best loan — and making sure your decision is one you can live with.
Most lenders offer loan packages that they can tailor to different needs. Shop around and get multiple offers from different lenders — at least three offers will make you feel confident that you have a complete picture of the loans available.
If you know you only want a 30-year fixed rate loan, specify that and also the features that are important to you. Mention that you will compare their offer to other 30-year fixed loan offers. Having multiple loan offers with the same basic criteria allows you to easily compare them.
Make a list of what you “must have” in each loan offer. Using your must-have list, call each lender and see how they are willing to address each point. If one lender’s approach appeals, let the others match it.
As the CFPB mortgage report suggests, brush up on the essentials with our mortgage basics.
Know your payments and your costs
Look beyond your basic interest rate and make sure your monthly payment is a number you can live with. Fixed-rate mortgages make it fairly easy to determine your monthly payments.
ARMs are more complicated than fixed-rate loans and there are two factors you should know about that determine your payments — the index and margin. The index is what your interest rates are tied to. Ask your lender which index they use and how it compares to others. The margin is extra points your lender charges for the loan. The index plus the margin determines your interest rate.
Closing costs are part of every loan. Some of them are standard and simply have to be paid. Others may be added to increase your lender’s profits. Your lender is required to provide you with a Good Faith Estimate which lists all of your closing costs and specifies points and origination fees.
You can often negotiate these expenses. If you plan to stay in your home for a while you may want to bring your interest rate down by buying points. If you plan to move or refinance soon, look for a lender who won’t charge you points. Origination fees are points that go directly to your lender’s profits and don’t lower your rate.
A few years from now, when you have more money at your disposal, you may want to pay off your mortgage early. But some lenders add prepayment penalties to your loan offer. Make sure you ask your lender about these and negotiate them as well.
As the CFPB mortgage report advises, compare points and fees when you check our mortgage rates.
Be a wise consumer and let our pointers help you get the most from this borrower’s market for mortgage loans.