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Answering the most frequently asked question regarding home financing
Frequently Asked Question:
Based on my credit score what interest rate will I qualify for?
Answer:
Credit score is the #1 indicator of what mortgage interest rate you will be eligible for.
You can get your score at www.myfico.com or other online resources. On the www.myfico.com website, there is also
a table that estimates the interest rate you can expect to pay based on your credit score. If your credit isn’t where you
like it to be, there are online resources and credit watch programs that will help improve your score over time.
If you don’t have much time, I can also refer you to a credit repair specialist that could increase your score 30-50
points in just 30 days. By increasing your credit score, you can save thousands of dollars in interest payments over
the life of your mortgage.
Some of the major factors that decrease your credit score are:
• Maxed out credit cards
• Too many credit inquiries from non-mortgage lenders (automobile, credit cards)
• Late payments
• Bills that have gone into collection
• Home foreclosures and bankruptcies.
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The costly mistake most frequently made by consumers when purchasing a home
Costly Mistake: So many buyers begin shopping for a home without first understanding how much they can afford.
You should not begin shopping or get in a Realtor’s car until you have been Prequalified by a Mortgage Professional.
Getting pre-qualified means you are issued a Loan Status Report, or LSR, which is a document that is referenced in
the latest Arizona home Purchase Contract. Without it, you cannot complete a legal purchase contract.
Not only does an LSR make you legal, it gives you four powerful advantages:
1. Saves you time by narrowing your search to homes that are within your payment expectations
2. Saves you money by lowering your risk of breaching a purchase contract and losing your earnest money
3. Lets you shop with confidence by knowing your buying power
4. Allows you to react quickly and make an offer before another buyer steals your dream home
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Answering the second most frequently asked question regarding home financing
Frequently Asked Question:
How do I avoid paying PMI (Private Mortgage Insurance)?
Answer:
The lender, or bank, requires PMI when the buyer has less than 20% equity in their home. PMI has good and
bad points, and there are ways to avoid paying it without putting down the required 20%. PMI or private mortgage
insurance protects the lender in case you default on your loan, it does not protect you! And, it’s expensive, sometimes
costing a few hundred dollars per month and is not tax deductible. PMI can be avoided a few different ways.
1) You can eventually cancel PMI if you can prove that you owe 80% or less of your home’s value.
This can be an advantage if you are refinancing and the value of your home has increased.
2) Piggy back Loan: This is where you can take 80% of the purchase price and put it on a traditional mortgage and
take the remaining 20% and place it on a second mortgage. Although your second mortgage may have a slightly
higher interest rate you may save in the long run because now all of the interest paid will be tax deductible and
if you pay off your second mortgage early, you will dramatically lower your monthly payment.
3) No-PMI loans: These loans will carry a higher interest rate but will not require you to pay the PMI. The mortgage
company pays for the PMI and gives you a higher interest rate that can be tax deductible. Deciding what option to
choose entirely depends on your financial situation. It is best to get out the calculator or ask your mortgage consultant
to see what will work best.
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Bait and Switch Tactic
Bait and Switch Tactic: Banks have trained consumers to look at interest rate as the number 1 decision factor when
refinancing. This has forced advertisers to focus on low rate advertising that often misleads the consumer. You see
this kind of advertising when shopping for a car. The car dealer advertises a single car at a ridiculously low price but
when you call the dealership, the car is no longer available. The same can be true in the mortgage business. Most
advertising will highlight an annual percentage rate (APR) that is very low to get consumers to call or respond to
the ad. Without fail, the advertised rate doesn’t apply to your situation or there is a lot of fine print that explains
necessary additions that ultimately increase the rate. The best way to get an accurate APR is to ask your mortgage
consultant to provide a Good Faith Estimate and a Truth in Lending Statement. You can use the Good Faith
Estimate and Truth in Lending Statement to get an apples to apples comparison of the various loan programs
you are considering.
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Rip-Off Tactic
Rip-Off Tactic: Adding Junk Fees to your closing costs
By law, you should receive a Good Faith Estimate within 3 days of submitting your loan application. A Good Faith
Estimate, or GFE, provides a list of all the costs associated with the mortgage program you’ve applied for. Take a
look at the pre-paid finance charges listed in the top section of the GFE, you should see things like: Loan Origination
Fee, Loan Discount Points, Processing Fees, Appraisal Fees, Credit Report fees, Tax Service Fee, Document
Preparation Fee and Flood Certification Fee. Some lenders will also include what are called “junk fees” to unknowing
consumers. Junk fees are not related to a real product or service but are included by unethical lenders to squeeze
extra money out of you. If any fees seem questionable or vague, ask your mortgage consultant for clarification.
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Costly Misconception #1
Costly Misconception: If I choose the best interest rate, I’m going to get the best deal.
This is completely false. Interest rate is only one component of a loan program, which is why it is called a “program”.
Make sure you fully understand the terms of the loan, especially if it is an adjustable rate mortgage. If you do shop
rates, make sure you are comparing APR between loan programs and that the APR includes all of the pre-paid
finance charges. As a general rule, if the APR is 2.5% greater than your interest rate, you are getting ripped off. Focus
equally on the interest rate and the finance charges you are paying to buy the loan. Watch for pre-payment penalties,
they can sometimes carry heavy penalties if you sell your home or refinance within 1 to 2 years.
In summary:
• Make sure your APR is no more than 2.5% greater than your interest rate
• Understand the loan “caps” if you are considering an adjustable mortgage
• Ask if the loan program has a pre-payment penalty if you refinance or sell the home.
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Costly Misconception #2
Costly Misconception: I don’t want to use multiple lenders because they will run my credit score multiple times
and my credit score will go down. There are new credit bureau rules that allow your credit score to be checked by
a Mortgage Company multiple times within a two week period and it will only count as one inquiry. In addition, the
score ignores all mortgage inquiries made within the 30 days prior to scoring. So, if you find a loan within 30 days,
the inquiries won’t affect your score while you’re rate shopping. If you do not have a trusted lender or loan officer,
get APR estimates from three different lenders. |
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