By Betsy Fallwell
I clearly remember my first meeting with a home loan broker as a first home buyer. My husband was at work, leaving me to wade through the complicated application process largely on my own. Even though it was 2006 – before a huge swath of new mortgage and lending legislation became federal law in the wake of the housing crisis and economic recession – it was still an overwhelming task.
At the time, I was naïve; I knew next to nothing about term lengths, interest rates, and closing costs. As a result, I ended up paying far more than necessary. Ever since, I’ve made it my mission to make sure no one – including myself – would ever get duped by the system again.
Working with the Right People
My biggest mistake as a first home buyer was starting and ending my search for a home loan with my current bank. I figured I’d been working with them for years, and assumed they had my best interest at heart. Because of this erroneous assumption, I failed to really compare a broad spectrum of home loans.
I should have worked with an independent mortgage broker instead. These professionals don’t work for any single financial institution, meaning they aren’t beholden to any bank, credit union, or their mortgage products, either. Instead, they are free to introduce you to home loans from a variety of lenders – brick and mortar financial institutions as well as online lenders – to help you find a mortgage that fits your lifestyle and budget. In exchange you pay them nothing: that’s right, nothing. Instead, they receive commissions from the lender whose loan who select.
Focusing on Now, Not Later
Adjustable rate, interest only, fixed rate: there’s a lot of jargon when it comes to comparing home loans. In order to truly understand whether you’re getting a good deal, you must first understand all this lingo.
An adjustable rate mortgage, or ARM, does exactly what it sounds like; after an introductory period – usually between three and ten years – the interest rate becomes adjustable. The introductory interest rate is usually very low, but after that, it fluctuates depending on market conditions; you have no control over how high (or low) this rate could go, putting you at risk of unpredictable and unstable rates and monthly payments later in your loan.
An interest-only loan is another product that may save you money up front, but won’t always do you a lot of favors down the road. You start by only paying the interest incurred on your principal for a set number of years; then, after that introductory period, you finally start paying down the principal as well. Just like with an ARM, this gives you low payments up front, and rising payments on the backend.
If you’re risk averse, you may consider a traditional fixed-rate loan instead. These also have a wide range of terms – as high as 40 years and sometimes as low as just 5 years – but you’ll see a stable interest rate and, hence, a stable monthly payment throughout that entire time. You’ll likely pay more on a fixed-rate loan than you would on an ARM or interest-only loan the first few years, but by the end of the term, the fixed-rate product will likely save you money.
Understanding Closing Costs
This was one of the major factors I overlooked in the home buying process. At first, I thought closing costs meant I’d have to pay my real estate agent for his services; I soon learned that buyers don’t owe their agent any money (they collect fees from the seller). Instead, closing costs on the buyer’s end come from things like:
- Your lender obtaining a copy of your credit report
- Home inspection fee
- Radon test (mandatory in some states)
- Origination fee on your loan (usually a percentage of the purchase price)
- Prepayment of annual property taxes
- Fees collected by the attorney who signs the paperwork
There may be more, depending on the type of home you purchase. In some states, you may qualify for a buyer’s grant. These “scholarships” are usually given to first home buyers to help defray closing costs, or to assist you with your down payment. A buyer’s grant is a tool used by local governments to promote home ownership, whether among certain income brackets, in certain neighborhoods, or among certain populations.
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