Buying Smart When Purchasing a Home

When the time comes to purchase a home, potential buyers may tend to fear the process or even think they are not qualified to make a home purchase. With a little education, they can dispel their fears and learn how to get the best loan for their money. Let’s begin the process in small steps.Important items to consider when shopping for a mortgage loan include:•Low rate•Closing costs•Pre-approval•Loan servicing•Simplicity of mortgage process•Finding the right loan for your needs•Experience/reputation of your lenderYou also need to consider how long you plan to live in the home; the amount of your down payment; and your comfort level with your monthly payment. Regardless of the kind of mortgage loan you choose, you will need sufficient funds to cover the down payment, pro-rated interest and any expenses listed in the terms of your purchase agreement.Pre-Approval makes Home Buying EasierBefore we discuss the various kinds of loans, let’s take a minute to check out pre-approvals. All pre-approvals are not created equal. A pre-approval that really works for you should be free, and the only condition should be that of getting an appraisal. This kind of pre-approval means the lender has already pulled and reviewed the homebuyers’ credit history and has collected and reviewed all necessary income documentation. The mortgage loan should be approved at this point, subject only to an appraisal. Once the purchase agreement is signed, the pre-approval should be converted into a mortgage.The best part of having a pre-approval is that you know exactly how much house you can afford. In addition, the sellers may give you a break on the price because they know you are serious buyers.One set of costs homebuyers sometimes fail to consider is closing costs. These are the costs associated with obtaining a loan. They consist of various one-time fees. A portion of the closing costs is fixed, while other costs may vary according to the terms of your purchase agreement. Fixed closing costs include:•Loan origination fee•Document preparation fee•Application feeVariable closing costs include:•Appraisal fee•Credit report•Escrow report•Escrow/closing fee•Flood zone determination/life of loan coverage•Title commitment•Special tax search•Recording fees•Survey•Final review (where applicable)•Title insuranceAnother important factor to consider is the number of points you pay on the loan. Points are a one-time sum of money paid to the lender, often considered pre-paid interest. The number of points you pay will affect the interest rate. Each point equals 1 of the amount you are borrowing. For example, one point on a loan amount of $65,000 would equal $650. Another cost added to your monthly payment could be private mortgage insurance (PMI) if the amount of your down payment is less than the lender considers necessary for their protection. The PMI protects the lender in case of default (homebuyer doesn’t continue to pay on the loan). The premium amount varies based on the loan amount, the amount of down payment, the term of the loan and whether or not the loan is a fixed rate or an adjustable rate mortgage (more about that later). Most lenders require PMI with less than a 20 down payment, while Third Federal requires PMI with only less than 15 down.Interest Rates are ParamountThe primary consideration for most people shopping for a mortgage loan is the interest rate. The mortgage rate is the most important component of your costs, and that’s why it’s a good idea to shop various lenders for the best rate. Mutual savings and loans, such as Third Federal, that don’t have to worry about shareholder dividends, often are more able to pass on profits to loan customers in the form of lower rates. Third Federal always invites you to shop and compare our rates against others when obtaining a mortgage loan.There are two kinds of conventional mortgages: fixed rate and variable (or adjustable rate). If you expect to live in your home for many years, the interest rate for your loan may be your primary concern. You may want a fixed rate mortgage that will ensure your principal and interest payments stay the same for the life of the loan. If you decide you want the stability and predictable payments of a fixed rate mortgage, you can choose from a variety of rates based on a 10, 15, 20 or 30 year term.An adjustable rate mortgage (ARM) can be considered a combination of a fixed rate and a variable rate loan. For example, on the 7/1 ARM loan, the interest rate is fixed for the first seven years, then the rate may adjust on a yearly basis, based on the fluctuations in the 1-year U.S. Government Treasury Rate. Periodic life caps provide protection against rapidly rising rates. At Third Federal, you can choose from a 1-year, 3-year, 5-year or 7-year ARM. When mortgage interest rates are trending higher (above 7.5), the adjustable rate mortgage can be an attractive option. ARMs offer lower initial rates and lower initial payments, which make your house payment easier to afford. And, because your rate and payments are lower with an ARM, you may qualify for a larger mortgage and a larger home. In addition, most ARMs have a low cost or free conversion option that allows you to convert to a fixed rate loan, generally sometime after the first year. Third Federal has a free conversion option.Rate Locks are Important when obtaining a MortgageWhen you are shopping for a fixed rate mortgage, the length of the rate lock can be very important. Most interest rates advertised are those with a 30-day rate lock. However, statistics show that in the Tampa Bay area, fewer than 20 percent of home loans are closed within the 30-day period. That's generally because the buyers and sellers agree they want more time before closing the loan for various reasons. Therefore, you may find your 30-day rate lock does you no good, and you are forced to take what may be a higher rate after the lock expires. Many brokers will give you a longer rate lock at the outset, but the rate will be higher. Some financial institutions (including Third Federal) offer a 60-day rate lock as a standard feature on its lowest rate. Be sure to check the length of the rate lock when you are checking on the interest rate itself.Rate Locks are also Important in Construction LoansThe kinds of loans we’ve been discussing are considered conventional mortgage loans used to buy existing homes. But, there are several kinds of construction loans available to buyers who are having their homes built. When considering a construction loan, a rate lock also is very important.. The rate lock is important because if your home is not completed before the rate lock expires, you can be charged the prevailing interest rate. Look for lenders with the longest rate locks, as well as those who allow you to lock in your rate when you apply for your loans. In today’s rising rate environment, rate locks on new construction are even more important. Third Federal offers two of the longest rate locks available: 12 months on a construction/permanent loan and eight months on an end loan.Construction/Permanent Loan: Generally, there are two kinds of consumer construction loans. One, the Construction/Permanent Loan, offers you the opportunity to apply for one loan, lock in one rate, and be assured of the necessary time to build your home before your start paying principal and interest. It’s simple, straightforward and requires you to only apply for a loan once.With this loan, you are in control and pay the builder an appropriate percentage as the home is in various stages of completion. The home will be inspected before every “draw” or payment to the builder, so you are assured the work has been completed satisfactorily. Builders like the loan, too, because the payment process is simple, and they get regular reimbursements during the construction period.The best news about this loan at Third Federal is that you can lock in your rate for 12 months when you apply. End Loan: The End Loan works when builders want to be paid in total at the end of construction. At Third Federal, you can get up to a 240-day rate lock (8 months) when you apply. You don’t start paying your mortgage until you sign off on the completed home and close your loan. At that point, you make your down payment, pay closing costs, and move in.Consider Customer Service, Servicing of LoansWhen shopping for your home loan, also consider the servicing. Many buyers prefer to have the same people who sold them the loan service the loan. That way, they have a local number, name and face to call if they have questions about their loans. Third Federal has never sold the servicing of its loans. Additionally, new homebuyers may want to take advantage of Third Federal’s First Time Home Buyer Clinics. First Time buyers also have the services of a personal mortgage counselor to help them through the steps of obtaining a home loan.There are many areas of the home-buying process not covered in this article because of space constraints, but we invite you to talk to a mortgage lender at any of our offices to have all your questions answered or go to http://www.thirdfederal.com/homemortgage.

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