A home buyer's winning hand: How to pick a mortgage
by Sam Ali/The Star-Ledger Wednesday April 09, 2008, 6:00 AM
You've found the home of your dreams and the seller has accepted your offer. Now, the big question is: How do you pay for it?
No big deal, you think. After all, you already pre-qualified for a mortgage even before you started searching for your home, right?
Although many borrowers think "pre-qualified" means they practically have their mortgage in hand, that's hardly the case, according to former New Jersey state Assemblyman Steve Corodemus, a real estate attorney based in Woodbridge.
"It means that we have someone who is alive, someone with a pulse," Corodemus said. "Buyers wear it like a badge of honor. But a pre-approval is usually not worth the paper it's written on."
Another common mistake homebuyers make is to think of a mortgage only as a means to an end -- home ownership. After all, they're buying a home, not a loan, right?
Banks sell money like car dealers sell cars. When you "buy" money from a bank, in the form of a mortgage, the bank charges you for it. And just like a car dealer, your lender would be very happy if you blindly accepted the sticker price.
Here, then, are some things to keep in mind when shopping for a mortgage to help you judge the good, the bad and the ugly.
1. Be clear about who you are working with and what their qualifications are.
Direct lenders, commercial banks, savings banks, credit unions and mortgage bankers: These are the folks that lend the actual money to the borrower at the closing table.
Mortgage brokers: They are independent contractors who act as middlemen between those who need a loan and those who lend the actual money. In New Jersey, mortgage brokers are licensed with the state, required to post a $100,000 surety bond and have a minimum net worth of $50,000.
Mortgage solicitors: Sometimes called loan officers or originators, solicitors are essentially salespeople employed by direct lenders or mortgage brokers. Unlike brokers, solicitors are unregulated in New Jersey.
2. Fixed rate or adjustable?
There are basically two types of mortgages:
With a fixed-rate mortgage, your monthly payment does not change. No surprises, no uncertainty.
With adjustable-rate mortgages (ARMs for short), you will have an interest rate that varies according to a number of economic factors. When interest rates generally are on the rise, the rate on your ARM will go up -- and, subsequently, the size of your mortgage payment. Conversely, when interest rates fall, as they have been recently, ARM rates and payments generally fall.
How to choose: According to Bankrate.com, there are a few things to consider before deciding which type of loan is best for you:
If you plan on living in your house for only a few years, a lower-rate ARM may make more sense.
When rates are relatively low, it may make sense to lock in a fixed-rate mortgage.
3. Prepayment penalties are illegal in New Jersey ... unless they're not.
Some mortgages come with a provision that penalizes you for paying off your loan balance faster. In New Jersey, these "prepayment penalties" are illegal, said Ehab Abousabe, a mortgage banker at First Choice Bank in Princeton Junction.
Unfortunately, just because state laws forbid or limit prepayment penalties doesn't mean your loan won't carry one, he said. Federally chartered banks -- which includes most of the big players, such as J.P. Morgan Chase, Wells Fargo and Washington Mutual -- follow federal laws, not state laws. And recent court decisions have concluded federally chartered banks are not bound by state consumer protection laws, including prepayment penalty limits, Abousabe said.
4. A pointer about points.
A "point," also known as a discount fee, allows you to pay up front for a lower interest rate. As a rule of thumb, one point is equal to 1 percent of the loan amount. So, for example, one point on a loan of $100,000 is $1,000 dollars.
To decide whether you want pay for points, think about how long you expect to live in the house, according to Bankrate.com. Over a short time frame -- less than five years or so -- paying points usually doesn't makes sense, as you will pay more in points than you will save in interest. However, if you plan to stay in the house for 10 years or longer, points will pay off over time.