- Interest Rate – is the biggest factor to consider because it’s the biggest part of your monthly payment. Lenders can play with this rate depending on the other terms of the loan below.
- Origination Fee – Is a fee a lender charges for making the loan. Some lenders don’t charge this fee and you have to watch the interest rate by comparison with other lenders who do.
- Points – Also a fee charge by lenders. One point is the same as one percent of the loan amount. Points are sometimes offered to buyers by lenders to buy down the interest rate. Deciding if it is worth paying extra money upfront to pay less interest over time is an individual decision. If you plan to be in the home for a lot of years then maybe worth it, if a maximum of 3 to 5 years maybe not.
- Amortization – Is the number of years you will be making monthly payments until the loan is paid off. The more years, the lower the monthly payment and the more interest you are paying. A typical length is 30 years. 15 years is next in popularity. It comes with a lower interest and a higher payment. Really depends on your individual circumstances, discipline and attitude about money.
Where to Start for Financing
I recommend starting with your bank where you do your banking currently, then other banks or a mortgage company, which typically shops several lending sources for the best terms for you. Yet they are a middle man and earn a fee for packaging your documentation for the actual funder of your loan. That fee may be part of the loan terms as in the interest rate and the funder pays them or part of the origination fees they charge up front. That is why it is best to shop around.
Be prepared to take notes when you talk to lenders because they have different options of the above terms which can be confusing trying to compare them. Make a column for the lenders name, columns with the above terms and a column for comments. So, you can keep the information organized. It helps as you compare them against one another. Ask the loan officer if there are any other cost that you have not discussed. Ask if there are any other questions you should have asked?
Some loan officers will do this over the phone and some will try to get you to come into their office, where it is easier for them to get you to commit to them for your financing.
What is P.I.T.I.
Once your lender pre-qualifies you which means going over your financials based on what you say, along with your credit score, they tell you how much you can afford for a purchase price and the maximum monthly payment P.I.T.I.
Principal – is the part of your payment that reduces the balance you owe. Starting out is much less than the interest amount and increases while the interest part lowers over time.
Interest – The largest part of your payment starting out that is what you are paying for the loan.
Taxes – Are the taxes that are assessed to each and every home by the county. This is estimated by your loan officer for the pre-qualification and then the loan officer firms up the number once you find your home.
Insurance – Is home owner’s general liability and fire insurance, required by your lender who gets listed as a loss payee so they get paid first in the case of a total loss by fire.
The loan officer will estimate the taxes and insurance until you find a home, then it will be accurate.
Also just because a loan officer tells you a specific price level you can qualify for does not mean you need to live at the top of your means. Being financially prudent leaves room financially for when “Life Happens”, so you can handle it without putting your family in financial turmoil.
Now the loan officer gives you an opinion letter, otherwise known as a pre-qualification letter. Some loan officers will use the term pre-approval, which is an exaggeration.
Pre-qualification – Is based on your word about your financials and credit score, that it looks good for you to qualify for a mortgage, yet nothing has been verified yet.
Pre-approval – Is when all your financials and credit score have been verified and your loan has been approved by the Underwriter. Who is the person that goes through all your documentation packaged together by your loan officer and his / her assistant called a processor. The Underwriter makes sure all the T’s are crossed and I’s dotted and if everything good gives the approval for your loan.
This is when your lender makes a commitment in writing that they are willing to give you a loan. This approval is only subject to an appraisal of the subject property and clean title. Now even though you are getting financing, with an actual “Commitment Letter” from your lender, I can present your offer “same as cash, just subject to title and an appraisal.” Meaning more negotiation power. Especially if we are competing against other buyers wanting the same home who are only pre-qualified.
So again, some loan officers in the market place like to use the term pre-approved loosely. They give buyers a pre-approval letter, even though nothing has been verified; it is still subject to verification of income and or credit. This is really only a pre-qualification which is still good enough to present with an offer to purchase a home.
Also, when you know you will be buying a house that needs some work, you must inform your lender of this up front. You do not want to pay for an appraisal then have the lender say they won’t finance the deal because of the work needed. Some lenders will finance with work to be done, and some will not.