Mortgage 101-What you need to know about getting a loan
*I am not a financial adviser or a legal adviser. This is for information only, base on personal experience. Your results may vary.
This is for some of you who are new to the world of money. Sooner or later you will be getting a loan. This should explain some details about mortgage loans. If you’re in trouble with a mortgage you already have, trying to refinance, or buying your first house; You need to know what makes a loan “tick”.
When you decide to buy a house, the first thing most people do is get pre-qualified from a bank. IMPORTANT: If you don’t like the terms from one bank, you can shop around. Most banks have different terms and rates to compete with others. Going to a mortgage broker can be helpful, just ask if they are a captive agent. Captive agents have contracts with certain mortgage companies and are not out for your interests. You want a non-bias, non-captive agent who can give you many options.
When you find a company you want to deal with and get approved, you should walk out with a “Truth of lending” statement and you should have locked in an interest rate. This statement shows two important parts; the annual percentage rate and the total payback. The APR can be locked in now before you leave or you can wait to lock in if the rate is dropping like it has been doing for the last couple years. The lender can tell you what the rate is doing. If you’re getting a mortgage anyway, half a point can make a big difference. The total payback is not a typo, you will pay back that much if you stick to the amortized schedule they have you on. There are ways to cut that number down. Check out my article, “Advantages of an LOC”, to learn how to beat down that number.
The thirty year mortgage was created after the great depression under the “fair housing act” to boost the housing market and help people get into a real home. It started as 20% finance if the homeowner can come up with 80% of the home price. Now we have 80% financed and 20% down. The structure of a standard mortgage is set up to pay the “bank” most of the interest in the first half of the mortgage and pay off most of the loan principle in the second half. You can’t change the way banks structure a loan or the numbers on the truth of lending statement, but you can take advantage of other rules.
Today’s loan contracts don’t have an early payoff penalty clause, if it does, don’t accept it. There are too many other banks out there that don’t. The object of this game is to push the loan past the first 15 years on the amortization schedule to the latter half where you are paying mostly principle, not interest. The amortization schedule is based on the principle balance at the end each month. When you pay extra money on a mortgage payment, that jumps you up on the schedule and any interest scheduled to be paid between the old balance and the new balance is canceled. Simply adding an extra $100 to each payment can cut seven years off the payoff date and save thousands of dollars of mortgage interest. I managed to pay an extra $11,000 on my mortgage in one year and that canceled $15,000 in interest using a line of Credit. My new payoff date jumped to 12 years earlier. Any money over the scheduled payment goes to principle.
Just because you get approved for “X” amount of dollars doesn’t mean you have to tie that much up in a house. Negotiate a house to around 80% of what you were approved for, you will be surprised how much a seller will come down on a price. Also, the longer the loan period, the more interest will be paid. Go with the shortest period that still offers a comfortable payment (if it is your personal home).
The point is, don’t be afraid to ask lots of questions until you know what is going on. Pride can get a person in a lot of trouble in this world. If the banker doesn’t want to answer questions or loses patience with you, don’t give them your business. It’s your name on the dotted line. Be smart.
If you need help with a mortgage problem, call us at 478-273-0062. We help people with real estate problems like this.
For more information about loan documents, listen to this audio.