Evaluating the bank's offer
Now you know how much you can borrow! You
should already have a rough idea of how much you can borrow based on
the How
much home can you afford? page, but now you get to find out exactly
how much the bank is willing to lend you. Once the bank has processed
your application and run your credit report they know how much they're
willing to loan you. Sit down with them and go over the results.
 Or
more specifically, they know how much they think you can afford in the
way of a monthly payment. Let's say they figure you're good for
$1000 a month. For that $1000 a month you'll get a much bigger loan on
a 30-year term than you will on a 15-year term. The lender will tell
you how much they'll loan on each term, depending on how big your down
payment is.
Get the Pre-Qual Letter
A lender who has qualified you for a loan can give you a
"Pre-Qual Letter" which says that very thing. (That they've
qualified you for a loan.) Having such a letter helps show realtors and
sellers that you're serious about wanting to buy a house and that
you're not just a window-shopper. Get a Pre-Qual Letter from each bank
that qualifies you for a loan.
Evaluating Different Options
The bank will probably give you at least a couple of
different, confusing options for your mortgage. They do this to
make more money, because if you pick the wrong option you'll wind up
paying more. Let's see how to evaluate the different options.
Fixed Rate vs. Adjustable Rate
Mortgages
(FRM vs. ARM)
On a normal mortgage the interest rate stays the same over
the life of the mortgage. This is called a fixed-rate mortgage, or
FRM. If interest rates are low then your lender will try to sell you on
an adjustable rate mortgage, or ARM, where the interest rate varies
over the life of the loan. If interest rates are low they don't want to
get locked in to getting a low rate from you for 30 years, so they'll
hope you take an ARM so they can raise the rates later. Why on earth
would you agree to this? Well, for starters, they make it look really
attractive: They'll generally start out your first year or two at a
rate below the current FRM rate. Then they'll tell you that
they'll limit the increases to a certain amount so you won't have to
worry about ridiculously high interest rates.
So should you take the ARM or not? The general rule of thumb
is, take the FRM unless the rate is above 10%, in which case take
the ARM (after scrutinizing it closely). Always make sure you read
the fine print on an ARM offer, but unfortunately the details in ARM
offers are varied and hard to analyze. . It's worth paying an
independent financial advisor $50 to evaluate the offer for you if you
don't understand it, or if you're not sure it's as good a deal as the
bank says. Don't get this one wrong: the foreclosure crisis of 2006-07
was due in large part to buyers who took an expensive ARM and couldn't
make the payments when the rates went up. They should have taken the
FRM -- and if they'd followed my advice above about taking the FRM
unless the interest rate is above 10%, they wouldn't have lost their
homes.
Mortgage Points (Origination
Points and Discount Points)
Origination Points
Most banks charge you a fee to give you a loan.
Basically, they're charging you money for the right to charge you more
money. Their fee for doing so is called the Origination Fee.
The fee is a certain number of points. A point is 1% of the
loan amount. So if you're borrowing $200,000, and the lender charges
one point, you'll pay a fee of $2000 for the privilege of getting the
loan. This is part of the closing costs, usually the biggest part, in
fact. You can usually have this amount added to your loan amount so you
don't have to pay it in cash at closing.
Different banks charge different amounts of origination
points, and some banks don't charge origination points at all. This
is something to consider when you're shopping around for a loan. And
some banks that normally charge points will reduce or eliminate the
origination fee if you ask -- and if they think you're going to take
your business to another bank.
Discount Points
As you know, the lower the interest rate, the
better. So many banks will offer you a deal: they'll offer you a
certain interest rate, but they'll let you buy the right to an
even lower interest if you pay them some points. For example, they
might offer you a rate of 7%, but tell you that you can have a rate of
6.5% instead if you pay 3 points (3% of the loan amount).
Is this a good deal or not? There's no way to know
unless you run the numbers through a calculator. So... presenting the Discount
Points Calculator! Here's how it works: Buying points lowers your
monthly payment. So we're going to figure how long it takes for the
savings from your lower payment to overcome the cost of buying the
points.
Note that while most closing costs can be rolled into
the mortgage, discount points cannot. The whole point of points (from
the bank's perspective) is to get some money from you up front.
Get another offer
Don't forget our advice from our find
a lender page: Shop around by getting a second offer from
another bank or broker.
You don't have to make your decision about which bank or
broker to go with right now -- you can save that for when you know
exactly which house you want to buy.
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Amount spent so far. Red items apply towards the
purchase. Amounts are typical, not exact.
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$40
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Credit Check
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To the Lender
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$40
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Total
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If you liked this site then you might like some of my other sites:
How to Find Cheap Airfare
How to Save Electricity
Slot machines demystified
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Michael Bluejay Inc. • All information is "use at your own risk" Contact
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