Purchasing a home for the first time can be a difficult experience. While searching for the perfect home, many first time buyers neglect to spend the same amount of time when shopping for a mortgage. As offers are made, and real estate agents facilitate the sale of the home, spending an increased amount of time structuring mortgage financing often is a second priority. Spending a little extra time with the mortgage is advised as rates and fees are negotiable and can save new homeowners thousands of dollars over the life of the loan, which could be up to 30 years. The five tips below are helpful for first time homebuyers as they cover areas of real estate financing that are often overlooked.
1) Compare Mortgage Broker and Mortgage Bank Pricing.
There are many direct mortgage lenders that offer competitive pricing and do enough volume where they are willing to work with first time home buyers and offer low rates and fees. Brokers may have access to the same banks and charge additional fees which could be avoided. On the other hand, mortgage brokers work with with many banks and may find you a program that is tailored to your financial situation. Get pricing from both a mortgage bank and a mortgage broker will help you decide which route to go.
2) Do not underestimate Adjustable Rate Mortgage (ARM) products.
Adjustable rate mortgages generally offer lower interest rates than fixed rate mortgages. Depending on the size of the loan, an adjustable rate mortgage can save first time homebuyers thousands of dollars in interest. The fixed period of the loan needs to be taken into consideration as well as prepayment penalties. Additionally, if a first time home buyer plans on moving in a short period of time, choosing an adjustable rate mortgage will reduce monthly mortgage obligations and free capital for savings or a down payment on a future property.
3) Good Faith Estimates are just “estimates”.
Many first time home buyers who are ready to close often find themselves wondering why pricing changes at the closing table. Sometimes interest rates change from the time the rate is locked to the date of the closing. Other times, unscrupulous mortgage professionals will increase the rate to create additional yield spread for themselves or company. In either case, if you are not comfortable with the pricing, do not sign the paperwork. It is within your rights to walk from the closing table if you are unhappy with a newly proposed deal.
4) Obtain a Home Equity Line of Credit
A home equity line of credit operates much like a credit card as there is a predetermined credit line that cannot be exceeded and a minimum monthly payment based on the amount of money used. Depending on the size of the down payment, (usually 20% now) the size of the home equity line of credit will be offered to a borrower if they qualify for it. The home equity line of credit can be delivered to the borrower at the time of closing. Tapping into home equity can be extremely beneficial for major expenses. (home improvements, medical emergencies, etc.)
5) Be Careful with Credit while Mortgage Shopping.
Purchasing a home can be an overwhelming event as there are many new expenses in the near future. At this time, applying for new credit cards can negatively affect your credit score. In turn, a lender may offer you a high interest rate or in the worst case prevent you from getting the loan. Additionally, be timely with all credit card payments during this period.