Home Mortgage Loan and Closing Costs

Choosing the right home loan is the key to having real home security; shopping for the right mortgage is at least as important as shopping for your home.  The right mortgage can save you tens of thousands of dollars and remember that when you signed up for the home mortgage, you signed up for a long term financial commitment.  Here’s what you need to know:

• Lenders use your credit score to set the interest rate on your mortgage.  To qualify for a good interest rate, you need a good credit history.  Know your score before you shop for the best rates; you are entitled to a free report from a major credit bureau once a year.  Generally, a credit score of 680 and above is considered good enough to get your home loan at the best interest rates.  Check out your own bank; they tend to offer their customers good deals. 

• If you are comfortably qualified for the loan you want and plan to stay in your home for many years, look for the lowest interest rate with a 15-year, long-term fixed rate loan.  You will save yourself a bundle on interest costs.  Shop around for a mortgage rate with various credit unions, both large and small banks, and online Internet lenders.  When you shop for rates, points, and fees, make sure that the quotes you get have the same terms.  Know also that there is nothing like a solid down payment to help you build up equity in your home immediately; not to mention that it will impress your potential lender and to help you avoid expensive private mortgage insurance.  Shop for the lowest basic interest rate and then compare the actual dollar amounts of all additional fees.

• Ask your lender to spell out every closing cost; this is where you can negotiate.  The average closing costs are about 3 percent of your mortgage, and it is depending on the type and size of your loan.  The lenders call what they charge to do business with you “the origination fee”; it’s typically expressed as a “point”, with one point equal to one percent of your mortgage.  There are two kinds of points:  Discount Points which lower the interest rates and percentage-based Origination Fees which cover some of the cost of getting you the mortgage, including commissions. 

• Adjustable-rate mortgage (ARM) may work if you expect to move within 5 years and want the slightly lower interest rate to help you qualify for the loan in order to buy the dream house.  The interest rates on these mortgages rise and fall with market interest rates.  Most ARMs adjust every year with a 2-percentage-point cap over the life of the loan.  You may find your monthly payment rising higher than you can afford in the long run.  Understand the long-term financial commitment (20-30 years); determine whether or not you’ll have the income necessary to manage the terms and conditions of that loan.  Ask about Prepayment Penalties or Early Termination Fees.  Some of the lowest rates especially for ARMs are available only on loans which carry hefty fees if the loan is refinanced in the first 3 to 5 years. 

• Consider hiring a good mortgage broker; he or she has access to wholesale markets, more loans, and more types of lenders than you can find on your own.  Consult with mortgage broker if you have had a history of credit problems or other special situations; this can be the best way for you to get a mortgage.

The size of your mortgage depends on available interest rates, the length of the mortgage, and whether the interest rate was fixed or variable.  Shop for your home loan carefully and watch your investment grows.  That’s good home economics.