Mortgages: Doing it Over
The truth is, unless you’re a real estate or mortgage professional, or you buy a house or two every month, you probably aren’t completely on top of the game just because you’ve played it before. You know a good faith estimate from a hole in the ground, but you’d benefit from a refresher course so you can turn that experience into real savings of time and money.
Shopping for a mortgage is probably the part you remember most clearly from last time and not because of all the fun you had doing it. Shopping for a lender may be the most exhausting part of buying a new home. So, in the interest of saving time and energy, you may be tempted to go with your old lender and just take whatever terms they offer.
Don’t do it. The market changes constantly. Getting the best deal available can save you thousands of dollars in the short term and many tens of thousands over the long haul. So buck up, and let’s get started.
Get Pre-qualified or Pre-approved
Not everybody does this as the very first step of the home-buying process, but it’s a wise move. You show sellers you’re serious, and you put yourself in prime position to move quickly should a bidding war ensue. To sum up:
- Pre-qualification takes a few minutes over the phone. You probably already know your price range, but a pre-qualification letter lets sellers know you’re serious. Call a lender, answer some brief financial questions, and you’re good to go.
- Preapproval requires an appointment with a lender and documentation of all your financial statements. If you’re buying within the next few months, get this step out of the way first and show a seller proof you qualify to buy her home. (However, don’t show the seller anything that indicates you can afford far more than you’re offering.)
- Getting pre-qualified or preapproved does not lock you in with a lender. You don’t owe a lender anything until you’ve signed the closing papers (although don’t pay upfront costs like appraisal fees until you’ve settled on one lender because they aren’t refundable).
The process of applying for a mortgage loan does ding your credit score slightly, but when a lender checks your credit that opens a two-week window during which subsequent credit checks have no adverse effects on your score.
So spend that two weeks comparing as many lenders as possible. Negotiate for the best possible terms; don’t be afraid to tell one lender what another is offering to see if he’s willing to beat the deal.
- Shop around for the best mortgage deal. Things have probably changed since you bought your first home.
- Apply for a no-closing-costs mortgage. Some new mortgage products have hit the market in the past year, including loans with no (or few) closing costs and no PMI. What’s the catch? Well, there is none. These loans are offered by companies so large they can afford to eat the cost, hoping that once they have you as a customer, they can sell you other, more lucrative products. One such lender is Bank of America; its No-Fee Mortgage Plus program offers a $250 Best Value Guarantee, meaning that if you’re approved for the program and choose another lender instead, Bank of America will give you $250. So apply. Either you go with them, or you can use the low closing costs to bargain with other lenders who may be able to deal with you on PMI and interest rate to get you an even better deal.
Know Your PMI Facts
Paying PMI has been out of vogue for a while; borrowers who can’t afford the full 20 percent down payment now usually opt for piggyback mortgages instead. A wrinkle: In 2007, for the first time, private mortgage insurance became a tax-deductible expense. This law is not permanent and has to be renewed each year, however, so your safest bet is to get a no-PMI loan or a piggyback mortgage.
Be Shrewd About the Good Faith Estimate
Forgotten what separates a good GFE from a bad one? Remember:
- Some fees are legit; others are not. Typical fees you should expect to pay are: title insurance, a rather hefty fee which protects the lender in case title issues crop up later with your property; courier fees; credit-check fees; underwriting fees; and prepaid portions of your taxes and insurance. Always ask about anything that confuses you, and if you feel you’re getting the runaround, ask a real estate attorney to look over the GFE.
- Some lenders skimp a bit on the projected property taxes for your home to make your overall monthly payment seem lower. Do your research and know what city and county taxes will come to, so you don’t get a rude shock down the road.
- Lenders may also fudge a bit on the amount of escrow you’ll have to prepay at closing; this depends on your closing date, both on the time of the month and the time of the year you’re closing. If you know the closing date, the lender should be able to give you an exact number.
TIP: Loan origination fees are not tax-deductible, but interest points are. If your GFE shows an origination fee of a point, ask if the bank can charge you an interest point instead. The bank gets the same amount of money, but you get the tax advantage.