When searching for a mortgage, it’s important to know the terms and what to look for to get the right one for you. For instance, paying attention to the APR when comparing rates between lenders can help you determine the true cost behind the mortgage and save you money. Also, knowing when to get pre-qualified, pay points to lower your rate or what’s the purpose of a loan estimate is key to getting the right mortgage for your needs.
Not sure of the house price range you should be searching? Check out our tips on figuring out how much house you can comfortably afford.
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In the current market with a lack of inventory, some real estate agents prefer a pre-approval over a pre-qualification, as pre-approval includes a verification process through your lender to determine exactly how much you are qualified to borrow. Contact our mortgage experts to learn more about pre-approval and how it differs from pre-qualification.
An annual percentage rate (APR) is a calculated rate that is different from the mortgage interest rate. The APR is intended to be used to compare loans from different lenders. The APR represents fees and certain loan costs, including points and interest, as a cumulative rate that is disclosed to borrowers. The Federal Truth in Lending Act requires mortgage companies to disclose the APR when they advertise an interest rate to help borrowers compare the true costs of the loan.
A point is an upfront fee, where each point is equal to one percentage of the mortgage amount. Paying points is a way to reduce or “buy down” a mortgage interest rate. If you borrowed $100,000, one point would cost $1,000. And that will typically buy down your interest rate a quarter of a percent. For example, if your interest rate is 4.00% and you pay one point, you get a rate of 3.75%.
Deciding whether or not to pay points to lower your rate depends on if you have the cash available to pay for the points upfront and the length of time you plan to stay in the home. If you have the cash available and if you continue ownership of the house beyond the breakeven point, you can recoup your upfront payment for points and begin enjoying lower payments for the remainder of the mortgage. If you sell the house before your breakeven point, you may lose money.
When comparing fees between lenders, you’ll want to compare the APRs. The higher the APR, the higher the fees associated with the mortgage. You’ll also want to obtain a loan estimate to get a true sense of all of the fees.
Within three days after you’ve submitted your mortgage application, you will receive an itemized estimate of the charges you’re likely to incur at the settlement or closing of the loan. This is called a loan estimate. The fees listed are estimates, the actual charges may be more or less. At closing, you will receive a closing disclosure which will show the actual costs for items paid at settlement.
It is important to compare fees when shopping for a mortgage. Lenders typically charge fees for services such as underwriting, processing and document preparation. They may also have charges relating to the origination, application and funding of the loan and tax services to list a few. Lender’s fees vary and can have a substantial impact on the overall cost of obtaining your loan.
Whether you should finance your home with a fixed rate or adjustable rate mortgage (ARM) could depend on how long you plan to stay in the home.
If you’re planning to stay more than five years, you may want to choose a fixed rate mortgage. You’ll have the security of a fixed rate and payment throughout your term. You’ll also build equity faster by refinancing into a lower interest rate and a shorter term, like a 15- or 20-year fixed rate, without a big jump in your monthly payment and you can choose a mortgage with or without closing costs.
If you’re planning on staying in the home for less than five years, an ARM could be the way to go. You can save thousands in interest by refinancing into a lower interest rate and with no closing costs. If you’re in the market for a jumbo loan, our ARMs have the same interest rates for higher loan amounts up to $750,000.
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The information presented is general in nature and is for information purposes only. It is not intended to provide specific legal, tax or other advice to individuals.