“I don’t want an education in mortgages, I just want to know enough to save as much money as possible on my new mortgage. Also, as an African-American, I want to avoid being taken advantage of. Any chance you can distill what I need to know into one article?”
Here are some quick
and dirty suggestions for vulnerable borrowers who want to save money
but don’t want to make the process into a life’s work.
Determine Your Status as a Borrower Before You Search For a Loan
You may not qualify, a common
occurrence in a market that has become very demanding in the wake of the
financial crisis. Or you may qualify, but not for the best prices
possible. In the first case, you must wait until you have
strengthened your application, and in the second case you may elect to
wait in order to earn a lower price.
A new site,
www.home-account.com,
charges a fee for access to a borrower grading system covering not only
credit and down payment but also your debt-to-income ratio and cash
reserves. Further, in each case where you fall short, the system will
advise you on exactly what you need to do. The system is a
work-in-process and I am involved in it as an advisor, director and
shareholder.
Don’t Respond to Solicitations by Loan Providers
I use the term
“loan provider” or LP to mean the individual mortgage broker or loan
officer with whom you deal. The best LPs get repeat business and
referrals from past customers and don’t need to solicit, but all
predators solicit because that is the only way they can get customers.
Conclusion: You will likely do better selecting an LP blindly from the
yellow pages than allowing yourself to be solicited.
Don’t Shop Prices With LPs Who Make More If You Pay More
Most LPs charge
what they can, putting themselves in a conflict position with the
borrower. They seldom discriminate, most are equal-opportunity
over-chargers, but African-Americans often pay more because LPs can more
often get away with charging them more.
To avoid this
conflict situation in dealing with a mortgage broker, you must negotiate
the broker’s fee in advance, with the fee inclusive of any payments to
the broker by the lender. Upfront Mortgage Brokers (UMBs) do this as a
matter of course, they can be found at
www.upfrontmortgagebrokers.org. With the broker’s total fee set, the
broker cannot increase his compensation by getting you to pay more for
the mortgage.
To avoid this
conflict situation in dealing with a lender, you must price shop at the
lender’s web site rather than with the LP. If you can find your price
on-line, you are not exposed to LP-gamesmanship, and you can monitor the
price until is locked.
However, while all
lenders have web sites, very few allow borrowers to find their own price
on their sites. The UMLs cited earlier do, which is what distinguishes
them as UMLs. In addition,
www.home-account.com allows you to shop among a group of mortgage
banks, and
www.mortgagemarvel.com allows you to shop among a group of credit
unions and community banks.
Mortgage Selection
If you expect to be
in your house for 7 years or more, the best deal is a 15-year fixed-rate
mortgage (FRM). The rate is currently running about .625% below that of
the otherwise comparable 30-year. But of course, you must be able to
afford the higher payment on the 15.
If you expect to be
out of the house within 6 years, select a 5/1 adjustable rate mortgage
(ARM) on which the initial rate holds for 5 years and then adjusts
annually. The rate currently is running about 1.125% below that on a
30-year FRM. And since all ARMs have 30-year terms, the initial payment
is well below that on the 15 and 30-year FRMs.
Avoid loans with an
interest-only option if you can. On a 30-year FRM, the option will raise
the rate by about .5%.
Cash Allocation
Cash is needed for
a down payment, points, other settlement costs, and cash reserve. You
have much more discretion over the first two, which also have a major
impact on the price of the loan. In today’s market, the price is
particularly sensitive to the down payment, expressed as a percent of
the lower of sale price or appraised value. On a refinance, it is equal
to appraised value less the loan balance. Increases in down payment
result in decreases in the interest rate, mortgage insurance premium, or
both.
Set aside the cash
you will need for transaction costs other than points and cash reserves,
then select the highest down payment pricing notch point (PNP) you can
afford. The PNPs are 3%, 5%, 10%, 15%, 20%, 25%, and 30%.
If you can afford 22%, for example, select 20% because the extra 2% will not affect the price. The “left-over” 2% can be used more effectively to buy down the interest rate. With 20% down, 2% of property value is the equivalent of 2.5 points, which can buy down the rate on a 15-year mortgage by about .375%. But don’t buy down the rate unless you expect to be in the house for 4 years or longer.