6 Things to Know Before Speaking to a Mortgage Broker
Did you know the Atlanta job growth rate YoY was nearly double the US average? With big name headquarters like Home Depot, Delta, and Coke and a booming tech industry, Atlanta is a hot-bed of job opportunities. For the real estate industry, this means there are more buyers in the Metro-Atlanta area than there have been in the past (particularly first-time homebuyers).
As a Realtor with Harry Norman, my goal is to help first-time homebuyers make the right choices about selecting an agent, choosing the right lender, and finding a great value for their home. One recommendation I have for all of my first-time homebuyers is that they get familiar with mortgage terms so they can ask the right questions when speaking with their lenders. In this blog post, I’ll break down the 6 Things to Know Before Speaking to a Mortgage Broker.
MORTGAGE BASICS
There are some terms you should know about so you can fully understand the total cost of your mortgage. The factors that go into your mortgage cost are the interest rate, discount points, and loan fees.
Interest Rate - the percentage of your outstanding loan balance that you pay the lender each month as part of the cost of borrowing money.
Discount Points - these allow you to “buy down” your interest rate at closing. One point equals 1% of your loan amount. The more points you pay, the lower your interest rate will be and the less you will have to pay each month.
Loan Fees - up-front charges to cover the cost of originating, processing, and closing your loan (among other things). An origination point is a loan fee that equals 1% of your total loan amount.
MONTHLY MORTGAGE PAYMENT
Mortgage payments are generally comprised of four parts:
Principal - the outstanding loan balance
Interest - the amount of monthly interest due, based on your interest rate
Taxes - one month of property taxes will be separated into your Escrow account to set aside for when your property taxes are due
Insurance - one month of homeowners insurance will be separated into your Escrow account and paid upon your homeowners insurance renewal
Homeowners Insurance versus Mortgage Insurance - Homeowners Insurance (also called “Hazard Insurance”) protects you against damage to your property. Mortgage Insurance protects your lender in the event that you fail to repay your mortgage.
DOWN PAYMENTS
Typically down payments range from 5% - +20% of the total sale price - there are options for qualifying first-time homebuyers to put as low as 3.5% down payment. That being said, putting more down for your down payment will lower your interest rate.
PRE-APPROVAL VS CONDITIONALLY UNDERWRITTEN
One thing that I cannot stress enough, particularly to first-time homebuyers is the importance of speaking to a lender and getting conditionally underwritten. This will give you a complete picture of your monthly payment based on your price range, down payment amount, and interest rate. Also, in a competitive market like Atlanta, to have a strong offer you really need to include a pre-approval letter or a conditionally underwritten exhibit. Here’s the difference -
Pre-approval letter - this indicates that a lender has taken a detailed look into your financial background and has committed to lend you a certain amount of money, pending specific property details.
Conditionally underwritten - this is the stronger of the two, it means that you have already applied for the loan with the only condition being that you find a home.
DIFFERENT TYPES OF LOANS
There are several different home loan products, but they fall into one of two general categories: fixed rate mortgages and adjustable rate mortgages. There are also government loans with more flexible qualifying programs.
Fixed Rate Mortgage - interest rates do not change for the entire life of the loan
You will have predictable monthly payments
You will be protected from rising interest rates (your principal and interest payments can never increase)
Adjustable Rate Mortgages - interest rates adjust periodically based on a market index
The initial rate is fixed for an introductory period and is then after that, the rate adjusts annually based on a market index. Because of the lower initial rate, some borrows may be eligible for a larger loan amount with an ARM than with a fixed rate mortgage.
Government Loans - these are offered by conventional lenders but insured by the federal government. The two types are FHA and VA.
FHA Loans - these are designed to assist home buyers by offering low down payment requirements and flexible qualifying guidelines; they’re backed by the Federal Housing Administration.
VA Loans - these are available to qualified veterans and active-duty military personnel and their spouses; they’re backed by the Department of Veterans Administration.
Flexible Qualifying Programs - these are designed for borrows with less-than-perfect credit histories, excessive debt, or previous bankruptcy, foreclosure, or tax delinquency.
SELECTING A MORTGAGE CONSULTANT
One thing that I would always recommend is speaking with a few lending institutions before selecting your mortgage broker. Once you have a few options, examine the numbers and look closely at the following numbers in order to make a fair comparison.
Total Loan Cost - not just the monthly mortgage payment and annual percentage rate
Cost of Points in Dollar Amounts
Broker Fees
Origination Fees
Underwriting Fees
Administrative Costs
Mortgage Insurance
Yield Spread Premiums
Escrows
Closing Costs
Potential Mortgage Insurance Costs
It’s important that your Realtor is knowledgable and can guide you through the basics of the lending process. If you have any questions about the home buying or lending process, please give me call! I’d love to be a resource for you.