Topics

asked & answered
business & career
day to day
divorce
faith/religion/spirituality
family
fashion
finances
health and well-being
helpful products & services
interesting people
love
meditation
philosophies and quotes
short stories
thoughts of the assorted kind

New topics will be added as we get contributions.

Someone quoted me a 5% fixed for 30 years, can you beat it? (Or, Why Apples are Real Estate’s Most Important Fruit)

by Christian LeBarton
Submitted: Monday, October 22, 2007

(Official Disclaimer: As a mortgage broker, I understand interest rates are very important when buying or refinancing a home. This isn’t a smoke and mirrors article designed to make you think otherwise. But it’s very important to know the basics of compare so if you do come across a less than scrupulous mortgage “professional.”)


More often than not, people focus so much on rate that they fail to look at the actual product that is available. My goal is to help you avoid this trap, save time and money, and hopefully let you spread the word to others.
There are hundreds of loan products offered to homeowners. Because of this, receiving a rate quote on the Internet or over the phone is futile if you don't understand the terms that apply to that rate. I always tell my clients to make sure we are comparing apples to apples – not apples to oranges. Comparing offerings is a huge part of the purchase or refinance decision, so let’s run through 5 simple steps that will let you do so.

1. Get a good faith estimate from your broker or lender. The good faith estimate is an industry standard document, which breaks down all of the costs associated with the loan and rate you offered to you. Law requires that you receive a good faith estimate (GFE) within 3 business days of your initial application. If you don't receive one, the person helping you has (hopefully) forgotten or (more likely) chosen not to give you one. By placing the GFEs from each offer side by side, you will be able to start comparing costs associated with each loan. Start is the operative word, here; a GFE can be misleading if you don’t…

2. Find out what criteria the loan officer used to get that rate. All lenders have documentation guidelines. Main components such as credit worthiness and the ability to provide income/asset documentation play a factor in quoting a rate. If someone quotes you a rate without looking at your credit report and asking about income documentation, that quote is worth, as the French say, doo doo. Comparing “apples to apples” also includes the documentation you need to provide in order to get the rate offered. Ask the loan officer whether he or she priced you on a full documentation or a stated program. These components make a difference in the paperwork you will need to provide and the rates that are available.

3. Find out if the rate is a fixed or adjustable rate. Most loans have fixed rates for 10, 15, 20, 30, 40 and now even 50 years! If you’re offered an adjustable, don't get confused if it’s described as “fixed” for a set amount of time. For example, a “3/27 ARM” is an adjustable loan, that is "fixed" for the first 3 years, but adjusts after that period. If the loan is an adjustable, find out what index the loan is tied to and what the bank’s margin is.

4. Make sure you compare loans that have similar characteristics. It does no good to compare one loan that has a prepayment penalty with one that does not. Often, the difference is six months of interest in penalties, which can be thousands of dollars out the door if you need to sell or refinance earlier than expected. Also, make sure you know if the offers have an interest only option on them. Simply looking at the expected payment on a GFE will not suffice. One lender may send you a GFE reflecting an interest only payment, but it does no good if your main goal is to pay off the home faster with a fully amortized payment.

5. Finally, and I think most importantly, is to trust your gut instinct. You must also compare who is making the offer. Was the loan officer knowledgeable, willing and able to answer your questions? Did he or she explain EXACTLY how they are paid? Were you presented with rate options, or simply told what you qualified for? Choosing the right person to work with can make all the difference in having a positive home loan experience!

If you feel like you’re not getting the full picture, or just have questions you’d like to ask painlessly (i.e. through the distance and pain-free world of email), please contact me at christianl@mfgroupmortgage.com . I’ll be happy to review any paperwork you have received, give you an unbiased opinion on the offer in front of you, and answer any other questions you may have.
Cheers!