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10 Best Mortgage Tips
Applying for a home loan could be a dreadful experience, especially if you are a first-time home buyer. There's a lot of paperwork and longwinded processing involved. But still, it is worth your effort. This comprehensive mortgage guide will walk you through the process of securing financing for your home and make you feel that applying for a mortgage is not that dreadful after all.
1. Learn the mortgage lingo
When you shop for a home loan and read through a number of mortgage terms and conditions, you will come across financial terminology that you probably won't find elsewhere. It is very important for you to understand those mortgage terms so that you can secure the best deal possible. In fact, many financial institutions and real estate firms offer free homebuying seminars, which can help you understand what people are talking about in real estate business. Here are some basic mortgage terms that you should know:
APR - Annual percentage rate, intended to reflect the annual cost of borrowing. It is also known as the "advertised rate" or "headline rate", that should make it easier for borrowers to compare lenders and loan options.
AAPR - The annualised average percentage rate or "the true rate". It is calculated for the nominal interest rate per annum, the compounding frequency and all upfront and ongoing fees over a seven-year period (the average term of a loan).
Arrears - An overdue amount of interest that is yet to be paid on your home loan.
Closing Costs - Closing costs include "non-recurring closing costs" and "prepaid items." Non-recurring closing costs are any items to be paid just once as a result of buying the property or obtaining a loan. Prepaid items are items which recur over time, such as property taxes and homeowners insurance. Usually a lender is supposed to estimate both the amount of non-recurring closing costs and prepaid items, then issue them to the borrower within three days of receiving a home loan application.
Collateral - A collateral is what you use to secure a loan or guarantee repayment of a loan. In a mortgage loan, the property is the collateral. The borrower will lose their property if the loan is not repaid according to the agreements of the mortgage.
Mortgage Insurance - Mortgage insurance is designed to protect the lender in case the borrower defaults on their loan, and the sale of the property cannot cover the outstanding debt.
2. Find out about the True Rate
The advertised rate often grabs borrowers' attention but it is actually not the one that borrowers should rely on. The AAPR or "the true rate" is a far better guide, as it takes into account all the fees and charges that will occur over the term of your loan.
Although the AAPR is a step up from the advertised rate, it is still just a quantitative tool. Once you've selected a few loans based on their AAPRs, you will still need to look into their other features. Some international research companies such as CANNEX and AIMS Home Loans can equip you with some insightful information about mortage loans and help you narrow down your options faster.
3. Check Your Credit
When you apply for a mortgage, your entire credit history will be scrutinized by your prospective lender. Credit scores over 620 have a very good chance of getting approved for a home loan with a good interest rate. If your score is below 600, however, your application may be denied or you may get approved at a much higher interest rate.
Whether you have a good or bad credit score, what you should do is check your credit report before your lender does. You can get your credit report from Equifax, Experian and TransUnion. If there are any errors, try to contact these three agencies and clear them up. This process can take a lot of time, so it is something you should do several months before apply for a home loan.
Paying down your financial obligations, such as credit card debt and car loans, before applying for a mortgage is also a great idea.
4. Don't let your bad credit score discourage you
Even if you have a bad credit history, you should still look around for the best deal. Don't just assume your only option is a high-cost loan. If your credit problems were caused by unavoidable circumstances, such as illness or a temporary loss of income, explain your situation to the lender or broker. Ask several lenders what you have to do in order to get the lowest possible price.
Don't fall for mortgage fraud
5. Lender or Broker?
There are two ways to apply for a home loan. First, you can deal with a lender or mortgage company directly. Second, you can hire a mortgage broker who will help you choose from a variety of lenders. Most homebuyers find it easier and cheaper to select a lender, without help from the third party. Besides, in order to find a competent and reliable broker, you will need to do a pretty good research and get references. That's why most people like to keep it simple and deal with a lender themself. In some circumstances, however, brokers can actually work in your favor. For example, if your credit history is not so great, an experienced broker may be very helpful in shopping and negotiating for the best possible deal.
6. Make lenders compete with one another for you
Seriously, never care about lenders' feelings. Make lenders or brokers aware that you are shopping for the best deal so that they will compete with each other for your business. Also, be thorough. When it comes to home loans, the most typical way people make a bad decision is by not knowing all of their options. Have your lender or broker break down all the costs associated with a loan, then ask about rates, fees or all other terms better than the original ones quoted or those you have found elsewhere. And most importantly, make sure that the lender or broker is not agreeing to lower one fee while raising another.
7. Do you need a lawyer?
Do you need a lawyer in order to apply for a home loan? No, you don't need one. But most experts suggest that you should have an experienced real estate attorney examine all paperwork before you make any commitments or sign any contracts unless you are thoroughly familiar with the mortgage process and all the filing requirements (the title search, the appraisal and inspections, and other tasks that require knowledge of town and state law). Some problems caused by wrong or incomplete filing might even invalidate the mortgage transaction. Hiring a good lawyer can help you not to make that kind of mistake.
8. Decide on the right mortgage
There are various types of loans available for potential homeowners. Thirty and fifteen-year fixed rate loans seem to be the ones that have been most applied for. If you need a very large mortgage, I suggest you choose a 30-year mortgage so that you can make lower monthly payment over a long term. But if you are willing to make higher monthly payment in order to save money on interest, a 15-year mortgage is probably the right choice.
If you plan to stay in your new house for only five years or less, an ARM (adjustable rate mortgage) can be a smart choice, as the initial interest rate will be lower than most fixed-rate loans. The 3-to-1 and 5-to-1 ARMs are quite popular among homebuyers nowadays because you lock in an attractive rate for three or five years. After that, the rate may go higher, but it won't make any difference since you plan to be in another house by then.
Useful Tips on Buying a Home
9. Get a Pre-Approval Letter
A pre-approval letter is not necessary, but it can make you look like a serious buyer and accordingly make home sellers be more interested in doing business with you. To get pre-approved for a loan, you have to submit your financial information to a lender. The lender will then look at your income, debts and credit history. If you meet their criteria, you will be pre-approved for a certain loan. For example, you might be pre-approved for a 30-year, fixed-rate mortgage at 5% until a given expiration date, typically 30 to 90 days.
10. Clarify and Verify
A pre-approval letter is very helpful, but not as biding as you might think. Once you find a home you'd like to buy, and your bid has been approved, you will have to go back to the lender and submit documents that corroborate your financial information to get a loan. Your assets will be evaluated. The lender will look into your employment history. You should have at least two years of employment history in the same line of work. If you are new to the work force, higher education may help you get approved. If you don't have enough of a credit history, you may use regular monthly payments such as rent, phone, or cable TV to show the lender that you are a creditworthy consumer.