by: Bill Teddings
Getting a mortgage is easier nowadays than it has ever been, although there are still one or two pointers you should always bear in mind when applying for a loan. Firstly, keep an eye on general interest rates - what you need to remember is that simply having a low rate does NOT make a bigger loan more 'affordable', you still have to pay off the money somehow at the end of the loan, and in these low-inflation times, a big loan now will still be a big loan in 20 years time! This is why 'interest only' loans (loans that do not require you to repay any of the capital each month) are maybe not such a great idea anymore.
Interest rates tend to follow an inverse relationship to Wall street - when the stock market is rising, interest rates tend to fall and vice versa. This is because investors are always looking for the best return on their investments. If you keep an eye on the Fed rate, and the rates offered by the big Savings and Loans, you won't go far wrong. Key to understanding interest rates is the concept of 'APR' or 'Annual Percentage Rate'. This is a figure used to compare loans from different lenders on a 'fair' basis, because most loans nowadays have different conditions and extras attached to them that have a direct monetary value.
In the USA and elsewhere, mortgage companies must disclose the APR when they advertise a loan rate. This shows the true cost of the loan to the borrower, expressed simply as an effective yearly rate. It basically stops lenders from hiding fees and front-loaded costs behind the small print of what appears to be a low interest rate. Here's a simple example. Say you borrow $100 for a year at 5% interest (i.e. you will owe $105 at the end of the year). Say you also have to pay a $5 'introduction' fee, and your total cost to borrow the money will then be $10. What this means is that the APR is actually 10%, even though the advert that drew you to the loan in the first place may have legitimately quoted '5%' elsewhere. The APR, however, must admit that the real rate is equivalent to 10%.
Having decided on the loan you want, your next step is to meet with the lender. Nowadays, most people prefer to meet with the mortgage company before starting the hunt for a house because by 'pre-qualifying' like this, you become more attractive as a buyer. The seller will know you are a serious buyer because you already have your finance in place, and can thus probably move quickly if a deal is struck. It also means you only go see houses in the right price range - nothing hurts more than finding a dream home then failing to get a loan for it due to the size of loan required.
When you meet the lender, always remember to ask what kind of 'lock in' deals they are offering. A lock in, also called a rate lock or rate commitment, means the lender will hold a quoted interest rate and a certain number of points for you while your loan application is being processed. Some lenders allow you to lock in the interest rate and number of points you'll be charged when you file your application, some do it during processing of the loan, while others prefer to do it when the loan is approved, or later.
And now all you have to do is find that dream house!