Considering a Mortgage?

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Here's what you should know.

Purchasing a home can be a good investment. Unlike most investments a home has a tangible benefit while you own it - you have a place to live.

First: What is my purchasing power?

Once you’ve decided that buying a home’s the right move, it’s time to ask the crucial question: what can you afford? That includes things like a down payment and monthly payments and how they fit your budget. Check your finances and, for starters, make sure you have enough cash to cover the down payment and closing costs. And over the long haul, you have other expenses to account for like homeowners’ insurance, property taxes, maintenance expenses and other things that pop up.

How much can you put down?

The best deals typically come with a down payment of 20% or more. On top of that, you’ll have to pay closing costs.

Finding the right mortgage

The mortgage process doesn’t have to be intimidating if you know what to expect. Lenders will want to know about your income (rule of thumb, no more than 28% of your pre-tax income on housing costs); debt (no more than 36% of your gross annual income); and credit history (make sure it’s solid and you pay your bills on time – you’ll probably get a better mortgage rate).

Second: What does my mortgage really cost?

The cost of a mortgage depends on things like principal (the amount you borrow); interest rates (the percentage of the principal you pay to borrow); repayment terms (length of time you take to repay); closing costs (the upfront fees to get a new mortgage); and fixed period (the portion of the repayment term that your interest rate/payments are fixed). Pay close attention to all, because they can add extra and unnecessary costs over the life of the loan. The higher the interest rate, the more your loan will cost.

Third: What kind of mortgage should I look for?

While shopping for a mortgage, you’ll probably pay close attention to lenders who offer the lowest interest rates, but rates aren’t the only thing to factor in. Your situation and goals are different than the next person. How long do you plan to stay in this loan? Or in the home for that matter.

Get ready to scratch that 7-year itch.

Many people think of a mortgage as a 15- or 30-year commitment, but the fact is that the average homeowner in the U.S. gets a new mortgage every 5 to 7 years. That’s because most people move, transfer with their job or refinance before their term’s completed. If that sounds like you, you may want to take advantage of the lower rates available for a shorter term fixed-rate mortgage vs. paying more to lock in for 15 or 30 years with a fixed-rate mortgage.

Be smart about buying down your rate

A great way to save on closing costs is to choose a loan that doesn’t charge you extra fees to get a low rate. Many lenders charge you a percentage of the loan amount (that you have to pre-pay at closing) to get a rate reduction. For example, on a $250,000 loan with a 2% rate buydown fee, you’d pre-pay $5000. As a general rule, it doesn’t pay to prepay interest if you aren’t planning on keeping your house, or your loan, for longer than 5 to 7 years.

Fourth: Ready, Set, Apply!

Lenders will ask you a lot of questions when you apply with them – so before you do, you should ask them some important questions as well. Here are some good ones:

  • Do you offer different interest rates within that same loan product?
  • How do I get your best interest rate?
  • Can my interest rate change before closing?
  • What fees will you charge me to get this loan?
  • After I close on the loan, what options do I have to extend my fixed interest rate period?

What about the paperwork and fees?

Lenders look at your credit worthiness via the mortgage application, which is why you’ll be asked to provide lots of paperwork about your income and debt – things like employment history for the past two years, W-2 earnings statements, recent paycheck stubs, federal income tax returns from the past two years and current debt (such as car loans and credit card balances). You’ll also need a stack of papers to show your home’s appraised value, a signed sales contract, an official surveyor’s drawing of the property and buildings on it, architectural plans if the home’s under construction and other info.

What else? Most lenders charge application fees and loan origination fees (2% of the loan amount) to cover the costs of processing your application. You can go online or check with your local bank or real estate broker to find out what you can expect to pay. If you can’t get a clear answer or if they seem to not want to answer – consider this a red flag that some fees will get tacked on.

Congrats, you're approved!

If your mortgage is approved, you’ll receive a Good Faith Estimate (GFE) and an offer letter from the lender detailing exactly how much you can borrow, how long the offer lasts, and the closing costs you can expect to pay at closing. These documents also confirm the loan’s interest rate, any charges and fees, the closing requirements, and the time you have to complete your purchase – usually 30 to 90 days. This is the time to review in detail the offer you’ve received. If you see that things have changed – fees have been added or that your monthly payment doesn’t look right – speak up and get the answers you need. Don’t wait until closing - at that point, it may be too late. If you agree to the lender’s terms, you can accept your offer by either signing and returning the letter or calling.

Lastly: Close the deal and open your door.

So you’ve found the house you want, made an offer that the seller accepted and you’re approved for a mortgage. You’re in the clear, right? Almost. You still have to seal the deal at the closing and have cash ready to cover closing costs.

Although closing procedures vary from state to state — and even from city to city — usually you (or your representative), the seller, lender, attorneys and any other parties will meet to sign papers and pay the costs that legalize the transaction. If you’re not sure what the closing procedures are where you live, ask your real estate agent or attorney to fill you in.

What about before closing?

The lender will provide you with the closing statement, also known as a HUD1, itemizing all of the final costs. The costs should be similar to those that were listed in the GFE. Then you’ll write several checks that close the real estate deal, sign your name more times than you can count, and sift through seemingly endless paperwork. Once it’s over, you’ll have your new mortgage. If it’s for a new home, just grab the keys and move on in. Refinance? Well, enjoy the savings and security of your new mortgage.