[photopress:14dust.jpg,thumb,alignright]If you read no futher, here are two key things you should do when getting a mortgage:
1) Get a “Good Faith Estimate” in writing!
2) Get a “Good Faith Estimate” from at least one mortgage broker and one bank.
Now, for those of you who want some more information…
When looking to finance a home, there are two general places you can look for a loan:
Also, you always have the option of paying for your home with cash. Sellers love all-cash deals. However, if you are planning on buying a home with all cash, quit reading now and call me up directly! I do backflips to keep my “all cash” clients happy!
If you can find a top-notch mortgage broker, hold onto him/her and don’t let go. A good broker has access to hundreds of loan opportunities and can find deals that just won’t be offered by your local bank. However, the downside of using a broker is that you’ve added one more person to the food chain that expects to make some money off your home purchase, so make sure that you comparison shop and that your broker earns their commission. If you are wondering where to start looking for a broker, I’d be happy to offer you some advice based on people I’ve worked with. Or, try the following acrobat (*.pdf) file that lists the members of the Seattle Mortgage Bankers Association. Some of the brokers I’ve worked with (and like) include:
- Alla Strok, potential bonus: she’s fluent in Russian
Just about every major bank (and smaller ones too) offers mortgage loans. In addition, the competition has spread to on-line banks with eTrade and Schwab now offing very competitive loans. I see no downsides to getting a “good faith estimate” from Schwab. They claim they will even give you $500 back if someone can beat their good faith estimate. Some banks to consider include:
Or, if you prefer, here is a full list from the google directory of banks that operate in Washington: banks and institutions
Some Mortgage Terminology
We might as well clear up some mortgage terminology so that we are all talking about the same language.
- Good Faith Estimate: The law requires that each broker or bank give a “good faith estimate” regarding the details of their loan. In practice this means that each broker or bank will give you a quote (based on an analysis of your finances including credit history) in a very similar format that makes cross comparisons quite simple. These good faith estimates are shockingly easy to read, so demand one from anyone that tries to give you a mortgage loan. Are you having trouble reading the good faith estimate? Have your broker explain any questions to you. If he doesn’t take the time to explain the details, go with another broker.
- Points: Fees paid up-front on your mortgage loan in order to lower the interest rate. Paying points make the most sense if you are planning to keep your loan for an extended amount of time. If you are planning to refinance or sell in the near future (less than a five years), points probably don’t make a lot of sense.
- 15- or 30-year fixed loans lock in an interest rate for an extended amount of time. The beauty of these loans is that the interest rate you paying will not go up for the life of the loan. For buyers looking to stay put for a while, these can be a take the guess work out of the future.
- 3/1, 5/1 or 7/1 ARM loans lock in an interest rate for a short time frame (typically 3, 5 or 7 years depending on the type) and then change to an adjustable rate that changes based on the Federal Interest Rate. The loans are best for people who want some short-term security regarding their rate, but are willing to accept potentially higher rates in the long-term to save some money now. These loans tend to work well for people who are planning to move in a few years or whose income is still on the rise. If your income is likely to rise in the future, you can probably accept higher interest payments later in order to lower your payments in the near future.
- 1-Year Adjustable loans are just an extreme version of an ARM. These lock in interest rates for a year, and then change to an adjustable rate that changes based on the Federal Interest Rate. Again, these loans are best for people who want some short-term security regarding their rate, but are willing to accept potentially higher rates in the long-term to save some money now. These loans tend to work well for people who are planning to move in a few years or whose income is still on the rise. If your income is likely to rise in the future, you can probably accept higher interest payments later in order to lower your payments today.
- Jumbo loans are loans for over a specific amount (I believe the amount is tied to the area that the loan is being given in). According to the Seattle Times, the current amount is $322,700. They charge more because the bank’s investment has more to lose with larger investments.
- Interest-Only loans are for a select few individuals and investors that are willing to add some risk to the situation. The idea is that you pay only the interest payments on the loan so that the principal balance does not go down. If you are in a neighborhood where prices have gone up considerably over the last few years, then an interest-only loan might have been a good option. Some times investors use these interest-only loans so that they can invest more but keep their monthly payments at an acceptable level. Interest-only loans are too risky for me, but that doesn’t mean they won’t work well for your situation. UPDATE: I was shocked to read that interest-only loans represented 1/3 of all home loans (nationally) last year. I knew that they were popular, but I hadn’t realized the extent. Politics in the Zeros. LA Times
Where do you start your search for a loan?
The process is really quite simple. Assuming you live in Seattle, check out the Seattle Times Mortgage Rate chart. (every major newspaper publishes something similar if you live elsewhere). This will give you a general feel for the rates that you can expect to find. However, note that this list is not comprehensive, and the banks are always finding ways to attach strings to these loans they advertise, so be skeptical of the data as presented. The next step is to demand that a Good Faith Estimate from at least one broker and one bank. Compare the results. Continue to ask for Good Faith Estimates until you are comfortable with the results.
The Power of Competition
There is so much competition in the home mortgage business, you could easily be lulled into believing that all the loans are nearly the same. However, my experience has shown that brokers and banks can often dig a little deeper and find a better rate if prodded. For example, when I went to get a mortgage for my home in Ballard, I had both a broker and Schwab bank give me a Good Faith Estimate. Schwab Bank clearly had the lowest rate, and when I showed the rate to the broker, he reevaluated the loan portfolio he had developed and found a much better deal. I showed his new loan proposal to Schwab and they beat his estimate by over 0.1%. I returned to the broker with Schwab’s new rate, and he admitted that he simply couldn’t beat it. Over the life of my loan, adding a little competition to the process saved me hundreds, if not thousands, of dollars.
Be realistic about your credit rating. If you have excellent credit then you can expect better options. With bad credit you may have to search harder to find a deal. With that said, a good broker can find a loan to finance just about anyone. If you go straight to a bank, the loan officer’s there are not always so forgiving.