Pam Porter

Sales Associate

The Cost of Your Mortgage Loan

Money Isn't Everything

When considering lenders, factor in the level of service they will provide throughout the loan process. I'll be glad to provide a list of lenders who have successfully helped clients in the past. I also suggest that you ask friends and family in the area for their recommendations.
 

The same care and consideration you give to finding the right house should be applied to your search for the right mortgage lender. For most home-buyers a major determining factor in selecting a lender is the cost of the mortgage loan. But how do you determine the cost of a mortgage loan?

Shopping for a Mortgage Loan

While most buyers concentrate on interest rates, it is best to look at all the costs associated with a mortgage loan. Mortgage loans include the quoted interest rate, points and closing costs.

More than Just Interest

A number of fees are associated with the mortgage loan, including:

Prepayment Penalty Mortgages (PPMs)

These loans restrict your right to prepay part or all of the principal in the loans early years. A prepayment fee is charged by the lender to the borrower who wishes to pay part or all of the loan ahead of the regular schedule. The advantage of a PPM is that they often have a lower interest rate than other mortgages.
 

Using the Annual Percentage Rate (APR) to Compare Mortgage Loans

The APR was designed to help borrowers understand the relative costs of a mortgage loan. The APR takes into account the various fees associated with the loan, which is why it is often higher than the interest rate. Understand that not all lenders calculate a loan's APR in the same way. That is why this should be only one of the factors used in selecting the best mortgage for you.

Locking-in Interest Rates

Another factor to consider when selecting a lender is whether the lender will lock-in the mortgage's interest rate and points. Click here to read more about Locking-in rates. 

 



Creative Financing

Seller Financing
As the seller, you have the option of financing the buyer's purchase with the equity you have in the property. You can finance part or the entire mortgage for the buyer. Before setting-up a private mortgage, it is wise to consult with your attorney.

Carrying Back a Second Mortgage
In the case of "carrying back a second mortgage", the seller loans the buyer part of the seller's equity. In this scenario, the buyer would finance the majority of the loan with a traditional mortgage lender and finance the remaining amount with the seller. Typically the buyer would pay a slightly higher interest rate on the loan financed by the seller.

Financial Issues

The Purchase Price
The seller and buyer's mutually agreed upon purchase price for the property. As the seller, you should know up-front that the buyer would like you to finance the deal. Knowing that you will be financing the deal may affect your willingness to make adjustments to the sales price.

The Down Payment
The size of the down payment may affect the buyer's commitment to honoring the mortgage contract. The larger the down payment the buyer invests, the stronger his/her motivation to protect the investment. In addition to making the monthly payments, the buyer's commitment to the investment would include a willingness to maintain and upgrade the property, as well as make tax and insurance payments.

The Interest Rate
At a minimum, the interest rate you charge should match current interest rates traditional mortgage lenders are offering for loans of the same term. You may want to charge an additional percentage point as compensation for the work involved with servicing the loan.

The Buyer's Credit & Income
You'll want to review the buyer's credit history to determine the buyer's willingness to pay his/her debts. A credit report will give you a better understanding of the buyer's financial history. Red flags would include late payments and loan defaults. If a buyer has a less than commendable credit history, you may decide not to finance the loan or you may require a larger down payment. In addition to the buyer's credit history, you'll want to review the buyer's income sources. Is the buyer's salary sufficient to make the monthly payments? Does the buyer have additional income sources that could be accessed if the buyer lost his/her job?

Amortization
The amortization period is the length during which the loan is repaid. The longer the amortization, the longer you are at risk that the buyer will default on the loan.

Balloon Payment
A common practice is to have the full amount of the loan due on a certain date, usually in 5 to 10 years. As the lender, this gives you a profitable short-term investment with the provision that your principal investment will be recouped in just 5 to 10 years.

The buyer is usually in a better position to secure traditional financing after 5 to 10 years. Both the buyer's equity in the property and record of timely mortgage payments can help the buyer secure a loan to cover the balloon payment.

Escrow for Tax and Insurance
Lenders typically require borrowers to pay 1/12 of their annual taxes and insurance costs as an escrow payment due with each mortgage payment. Then, the lender makes the borrower's annual tax and insurance payment. While this adds time and hassle to the seller-financer, it also protects you from the unfortunate situation of having a buyer make his/her mortgage payments but not tax and/or insurance payments.

Lender's Title Insurance
A smart investment is a lender's title insurance policy. The policy protects your lien on the property from being defeated by a prior lien or other interest in the property, which, if exercised, would wipe out your security. Things that can affect your rights as the seller-financer include marriage, divorce, death, forgery, a judgment for money damages, a failure to pay state or federal taxes, and more. Be sure to include the cost for your lender's title insurance as one of the buyer's closing costs.

Closing the Sale
Both buyer and seller will be responsible for paying the usual closing costs. You will also want the buyer to pay all the costs associated with setting up the mortgage financing. This would include the cost of having your attorney create the mortgage note.


Mortgage Programs

Private Sector

Conventional Loans - The only security guarantee is the value of the property.

Conforming Loans
Conventional loans that follow the terms and conditions established by the guidelines of Fannie Mae and Freddie Mac.

Jumbo and Non-Conforming Loans
Loans above the maximum amount established by the guidelines of Fannie Mae and Freddie Mac. Often the interest rate charged for a jumbo or non-conforming loan is higher than that of a conforming loan.

Government

FHA Loans
The Federal Housing Authority (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD), plays a significant role in helping low- to moderate-income families qualify for mortgages. FHA assists first-time buyers and others who would not qualify for a conventional loan, by providing mortgage insurance to private lenders. Interest rates for an FHA loan are usually the going market rate, while the down payment requirements for an FHA loan are lower than conventional loans. The required down payment can be as low as 3 percent and the closing costs can be included in the mortgage amount.

VA Loans
VA Loans are guaranteed by the U.S. Department of Veterans Affairs. Service persons and veterans can qualify for a VA Loan, which usually offers a competitive fixed interest rate, no down payment and limited closing costs. While the VA does not issue the loans, it does issue a certificate of eligibility required to apply for a VA loan.

RHS Loan Programs
The Rural Housing Service (RHS), which is part of the U.S. Department of Agriculture, guarantees loans from private lenders to help low- to moderate income families qualify for mortgages.



The Cost of Your Mortgage Loan

Locking-in the Rate

Floating the Rate

Buyers opt to float the loan when they believe interest rates will drop after their loan application date and prior to closing. The risk is that rather than dropping, interest rates rise, increasing the mortgage payment.
 

When shopping for a mortgage, the lender may give you a quote for the mortgage interest rate and points (additional fees charged by the lender usually paid at closing by the borrower). These only represent terms available at the time of the quote. They may not be available by the closing date (which may be weeks or months in the future). To ensure the rate and points are the same at closing as they are when quoted, you'll need to lock-in the interest rate (also known as a rate lock or rate commitment).

Obtain a Written Agreement

Most lenders will commit, in writing, to a mortgage interest rate for a specified time period while your loan application is processed - this is known as "locking-in" the rate.

If you elect to lock-in an interest rate, it is best to deal with a lender who provides a written lock-in agreement. Be sure to read this agreement carefully, some lock-in agreements become void due to actions beyond your control - such as a change in the maximum rate for VA-guaranteed loans.

Lock-in Options

The following lock-in options are common among lending institutions. Be sure to ask the mortgage lenders you are considering which lock-in options they offer.

The Cost of Locking-in the Rate

It is not unusual for a lender to charge a fee for locking-in an interest rate and points. This fee may vary depending on the amount of time you want to lock-in the rate (the lock-in period).

The fee may be charged when you lock-in the rate (and is rarely refundable if you withdraw your application, if your credit is denied or if you do not close on the loan) or it may be included in your closing costs. The amount of the fee and when it is charged will vary among lenders.

The Lock-in Period

Most lenders will offer lock-in periods of 30-60 days. Some lenders may only have short lock-in periods. And still others may offer a longer lock-in period (expect higher fees for longer lock-in periods).

The lock-in period should be long enough for the loan approval process and to allow for any other contingencies that may delay closing.

The Lock-in Expiration Date

If unexpected circumstances prevent the loan from settling prior to the last day of the lock-in period (whether caused by you or others in the process - including the lender), you lose the interest rate and points that were locked. Prevailing interest rates and points are usually charged under these circumstances. Be sure to ask your lender before you lock-in what interest rates and points will be charged if the loan is not closed before the lock-in period expires.