Anna Fleet

08/13/2007

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Don’t be Taken Advantage of by the ‘Mortgage Game’!

Sage Advice for First Time Homebuyers.

Buying a home is probably the single most expensive financial decision you will make. However first time homebuyers can sometimes be taken advantage of by the “mortgage game”. The mortgage process can be downright confusing, and the last thing you want is to make costly mistakes when you’re already signing up for the biggest loan of your lifetime.

First time homebuyers aren’t all taken advantage of by the mortgage process! It’s a first time homebuyer’s responsibility to be familiar with the different types of mortgages available, and to stay on top of the current market interest rates. Your mortgage rate will affect your financial future for years to come. So getting the best possible mortgage rate should be your main priority, but how do you go about it? Follow our helpful steps to help you during the mortgage negotiation process. These tips will help you obtain the best mortgage possible – and save yourself a lot of money and worry in the long run.

1. Origination fee – What the heck is an origination fee? I asked myself the same question when I was in negotiation on my first mortgage. Most lenders will charge what is known as an ‘origination fee’, which means a fee that the borrower pays to the lender in order to cover the costs of administering (or originating) the loan. This fee is tacked onto your mortgage and can increase your annual percentage rate (APR). An average origination fee is 1%, if your lender’s is higher – it’s time to negotiate or threaten to use another lender.
   
   
2. Improve your credit score – by keeping up with the payments on all of the existing loans in the time leading up to your application for a mortgage. Also keep on top of regular payments for credit cards, and don’t take out any new credit cards or loans. Keep in mind that while paying off the balances your credit card balances will improve your overall future credit history; close credit accounts just before you apply for a mortgage will reduce the amount of credit worthiness you have – and actually reduce your credit score. So just keep up with the regular payments. Lenders like to see stable, loyal credit borrowers.
   
   
3. Get a copy of your credit report - to inspect it for inaccuracies that may reflect badly on your credit. Your credit score will greatly affect the interest rate you get. Generally the higher your credit score – the better your interest rate, so if you know that you want to buy a home, its wise to work to improve your credit score in the time leading up to your mortgage application. Ignoring your credit reports is probably the worst mistake you can make. According to the federation of state Public Interest Research Groups (PIRG), 1 in 4 Americans have inaccuracies on their credit reports that could cost them a good mortgage rate – and possibly to be approved for a mortgage.
   
   
4. Lock your mortgage rate in – is a win-win situation for the borrower. This negotiation trick lets you lock in your current mortgage rate for a period of 30 to 60 days. It will guarantee your rate, so that even if the rates skyrocket during this time, you will still pay the same rate; however if they drop, you get the lower rate.
   
   
5. Negotiate – Remember the lender wants and needs your business, so be ready to fight for what you deserve. If you’ve locked in a mortgage rate, but the average rates drop market wide, don’t be afraid to demand the lower rate. The lender needs you more than you need him or her.
   
   
6. Monitor the average market interest rates – Monitor the average market interest rates before you apply for a mortgage. As a general rule, you want to borrow when the interest rates are down. Financial analyst websites such as HSH Associates Financial Publishers will forecast interest rates for next month, the next six months and maybe even for the next year. Obviously this isn’t an exact science, however it can help you determine the best time financially for you to buy a new home.
   
   
7. Don’t borrow beyond your means – This is probably the biggest financial mistake you can make. Mortgage lenders will get you all hyped up with a huge qualifying mortgage amount; however there’s a difference between the maximum payment you qualify for, and the monthly payments that you can actually afford.
   
   
8. Stick with your JOB! - Lenders feel more comfortable lending to those with steady employment – so keep your current job, even if you hate it until after your mortgage is approved.
   
   
9. Mortgage term – You will likely be able to choose from a range of 15 to 30 years for your mortgage loan term. The loan term refers to the length it will take you to pay off your loan according to your borrower’s agreement. There are positives and negatives to both ends of the loan term spectrum. For instance if you opt for a 15 year mortgage term you will pay higher monthly mortgage payments, but you’ll pay off your home in 15 years. However if you opt for 30 year mortgage term, your monthly mortgage payments will be lower, but you won’t pay off your home for 30 years. Plus with a shorter loan term you’ll pay less interest. With a 30 year loan term you will pay thousands of extra dollars in interest payments – simply because the loan is longer.
   
   
10. Get familiar with the various mortgage types - The isn’t just one type of mortgage available to you as a first time home buyer – there are traditional mortgages, variable interest rate mortgages, fixed rate mortgages, balloon mortgages, and many, many more. But how do you know which mortgage best mortgage for you. Just because your neighbor went with a fixed rate mortgage – doesn’t mean you should. After all the mortgage rates won’t drop, and being locked into a fixed rate mortgage could cost you a lot of extra money. However perhaps you prefer the peace of mind of knowing what you will pay every month, and not the instability of a variable rate mortgage? Different mortgages suit different homebuyers. My advice is to choose the one that best suits your financial situation. For more information on the various mortgages available to first time homebuyers, read our related article on Understanding your Mortgage Options.