Selecting a new home mortgage can be confusing and complex, but buyers are getting some help from legislation that went into effect last year. The Real Estate Settlement Procedures Act requires a good faith estimate of closing costs be made on a standardized form that includes an easy-to-understand summary of loan terms. Lenders must provide the estimate within 72 hours of receiving a loan application and must honor it for 10 days to give buyers a chance to shop for other loans.
| Check on length of time to closing |
| Some lenders can take months to close a loan, others 30 days. Buyers who need a short closing period should ask their lender if it can process the loan in time. If the answer is not a yes, they should shop around. |
Even with the new law, however, third-party fee estimates in a mortgage can be off by as much as 10 percent.
So it is important, experts say, for buyers to pay attention to the key parts of a loan when deciding which one is right.
One important detail to keep in mind is that the lower the interest rate, the more affordable the monthly payment will be.
“Get quotes from different lenders as close together as possible, ideally on the same day, because interest rates move all the time,” said Greg McBride, senior financial analyst for Bankrate.com.
The interest rate, however, represents only one part of the loan’s costs and can vary depending on the number of points or percentage-based fees included. Each point equals 1 percent of the loan amount.
Points may consist of the lender’s fees to process the loan, third-party fees such as appraisal costs the lender passes on, and any discount points that the borrower elects to pay in exchange for a lower interest rate. Paying extra points means paying more cash up front at closing.
“Paying more points only makes sense if you plan on owning the home a long time,” said financial planner Jill Curran of Prospect Financial Group.
Because every lender breaks down fees differently, look at the total number of points for the loan rather than comparing each fee, advised Keith Gumbinger, vice president for financial publisher HSH Associates. Most borrowers only pay about one or two points total, he added.
Interest rates and points will vary depending on duration of the loan. Adjustable-rate mortgages offer the lowest rates because borrowers assume more of the risk. ARMs are a good choice only for buyers who plan to sell the home before the rate expires, and it is a good idea to have a buffer zone.
“If you think you’ll sell the house in five years, get a seven-year ARM, not a five-year ARM,” said financial planner J.T. Hatfield Smith of SPC Financial Inc.
That allows for more time to sell or refinance if things don’t pan out as expected.
By comparison, fixed-rate mortgages offer greater security. “You get a payment that isn’t going to change, and it will become less of a burden as your income increases,” McBride said.
Fixed-rate mortgage rates remain low. Thirty-year loans recently averaged 5.05 percent with 0.7 points, according to a Freddie Mac survey, so after the tax deduction for mortgage interest is factored in, the actual rate would be closer to 3 percent, Smith said.
Interest rates for 15- and 10-year fixed-rate loans are lower still for buyers who can afford higher payments. “Monthly payments are about 20 percent higher on a 15-year than they would be for a 30-year loan,” Gumbinger said.
While it’s commendable for buyers to want to pay off their mortgage in 10 or 15 years, “it shouldn’t come at the expense of saving in a 401(k) or your child’s college fund,” Curran said.
