How to Compare Loan Offers from Banks
Start with a general idea of the type of loans you want to investigate, have an idea of how much down payment you can afford, and work your budget numbers so you know exactly how much of a monthly payment (principal, insurance, taxes, and interest) you can afford. When you start checking around, here are the questions you should explore with each lender on various key issues.
Ask the lender how often it updates its loan rates each day or week. When you get the rate, ask if it's fixed or adjustable. If it's the latter, ask how and when your rate will go up or down and what the yearly and lifetime cap on those moves are. Get the annual percentage rate (APR) on the loan and ask what the APR is comprised of — points, credit charges, or other fees. Then compare that APR to that of other lenders.
Points are specific fees paid to the lender. They are linked inversely to the interest rate: The more points you pay, the lower your rate. Make sure your lender can quote points as the actual dollar figure on your loan so you'll have an idea of what you may be able to deduct on your taxes.
Keep your guard up against advertisements and loan officers who may tell you that you're getting a loan with no closing costs. They're lying. Just make them explain how they're making their money. There will be some nonrecurring fees in there somewhere.
Remember, a point is equal to 1 percent of the loan amount, and paying points allows a borrower to lower the interest rate on a mortgage.
Based on your financial or tax situation, you might want to check in with your tax planner to see if it would make sense to pay points on that loan. In making your decision, there are always variables that apply to the kind of property you're buying and your tax situation, so get some advice. But generally, if you're not planning on holding a particular loan for at least six or seven years, it can be silly to pay points because it's extra money at the outset that you'll never get back from your savings on the lower rate the points are meant to get you. For more detail on the application process and what it may cost you, turn to Chapter 8. In case you're wondering, the IRS lets you deduct points during the year you paid them, under the following conditions:
1. Your loan is secured by the home you live in most of the time.
2. Paying points is an established business practice in the area where the loan was made.
3. The points paid were not more than the points generally charged in that area.
4. You report income in the year you receive it and deduct expenses in the year you pay them.
5. The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.
6. The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. The funds you provided do not have to have been applied to the points. They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. You just can't borrow these funds from your lender or mortgage broker.
7. The points were computed as a percentage of the principal amount of the mortgage.
8. The points amount is clearly shown on the settlement statement, Form HUD-1, as points charged for the mortgage. The points may be shown as paid from either your funds or the seller's.
There's really no such thing as a no-fee loan, no matter what you see in advertising. By law, you'll get an early estimate of fees when you apply and a firm estimate three days before closing. Just remember that all lenders have a profit target, and if they eliminate one fee, it might be tacked on elsewhere. Ask for a detailed explanation of what each fee includes. Several items may be lumped into one fee.
As stated earlier in the book, the conventional 20 percent down payment has become a thing of the past. Some lenders now offer conventional fixed-rate loans with as little as 5 percent down. If you have flexibility to put down more, talk to your lender about what private mortgage insurance (PMI) will cost. Some people come up with alternate financing arrangements to avoid PMI, but see if paying PMI might actually be a better deal than something like a piggyback loan.
If you can't afford a 20 percent down payment, see if you qualify for government-assisted programs such as FHA (Federal Housing Administration), VA (Veterans Administration), or Rural Development Services, which will allow you to put down a significantly lower payment. If you run the numbers and elect to take PMI, ask how long you'll have to pay it.
