You're looking into buying your first home or refinancing your existing loan to a lower interest rate - congrats! But while you probably know the basics of the mortgage process, did you know there are a whole lot of nitty-gritty details that can go into getting the best deal on your mortgage?
In fact, there is a lot of information that could save you hundreds or even thousands of dollars in what may be the biggest financial decision of your life.
That's why we spoke to three experts in the mortgage field who told it like it is.
Read on to learn some vital, cherry-coat-free truths before you shop for your next mortgage.
Truth #1: Prequalification Doesn't Mean Much
If you receive a letter saying you're prequalified for a mortgage, don't start celebrating just yet. That's because when it comes to a mortgage, getting prequalified could mean nothing at all, says Jillayne Schlicke, founder of the National Association of Mortgage Fiduciaries.
Here's why: Anyone can say they make a certain amount and their credit is great and get "prequalified," Schlicke says. But that's merely based on words, without any hard evidence.
"So you can pretty much pre-qualify for anything you want, but that's very different than actually filling out a loan application and verifying what's on the loan application," she says. This process of actually filling out the loan application leads to a preapproval - which is what really counts.
"Preapproval means the loan originator has obtained documentation to support claims that, for example, the borrower makes a certain amount of dollars per month, or the borrower has good credit," Schlicke says.
The moral here? Documentation and approval - which, again, is different than qualifying - is the only assurance that you'll actually get a mortgage, says Schlicke.
Truth #2: Not Everyone Gets Approved for the Lowest Rates Advertised
Remember the old adage, "If something's too good to be true, it probably is"? Well, keep that in mind when shopping mortgage rates, or seeing ads that advertise rock-bottom mortgage interest rates.
One problem with these ads, says Schlicke, is that often the rates advertised are for adjustable rate mortgages (ARMs), or even 10-year mortgages - which are not usually the loans desired by consumers.
"Most people want 30-year mortgages," says Schlicke. But those rates are higher. "It's the classic bait and switch," she says.
Further, even if the rate is indeed for a 30-year mortgage, usually only a select few borrowers qualify for the lowest rates advertised, says Jim Duffy, a mortgage banker with Cole Taylor Mortgage in Atlanta, Georgia.
While there are many elements that go into determining your mortgage interest rate, he says one of the biggest factors is your credit score, which can run from 300 to 850. And the higher your score, the better interest rate you'll get.
Truth #3: "No Cost" Loans May Not Be Exactly What They Seem
The mortgage business is in fact a business. So just as you wouldn't expect your mattress salesman or auto mechanic to give you products or services for free, don't expect your mortgage lender to either, says Justin Pritchard, a financial planner who writes About.com's banking and loans column.
"When you refinance with no points or fees, what you're really doing is adding those costs onto your loan balance. No closing costs basically means, 'we'll lend you the [closing costs],'" he says.
In other words, they'll build the fees and costs into the amount you are financing so there is no money due up front. This way, you're not only paying the fees and costs, but you're also paying interest on them for up to 30 years. For example, if you have a $300,000 loan with $10,000 in closing costs, your loan amount would be $310,000 instead.
Another scenario is that the lender will actually not charge fees at all, says Pritchard, but charge you a higher interest rate to make up for it.
"What they're doing is selling the borrower a higher rate. And so the borrower does pay. They pay in the form of a slightly higher payment every month," adds Schlicke.
To be fair, there are times when these types of mortgages could make financial sense, says Pritchard, if, for example, you are lowering your current mortgage interest rate by enough.
But the point remains: check the fine print and get the whole truth about your mortgage.
Truth #4: You Should Not Feel Pressured to Lock Your Loan
If you are refinancing your current mortgage or getting a new one for a home you are buying, there will come a time when your mortgage broker or lender will ask you if you want to "lock" the loan. This means that you accept the terms of the mortgage, including the interest rate. After you lock, that is your rate, whether interest rates go up or down in the mortgage market.
And here's the thing: that can be a stressful time, especially if your loan originator is pressuring you to lock. But, says Schlicke, it should not be.
"Consumers should never feel under pressure at any time by their loan originator to commit. That's used car salesman tactics," says Schlicke. Schlicke says that typically, the reason the consumer is being pressured is because the deal that's being offered is not that good. Therefore, the lender wants them to lock so they don't go and shop rates from other lenders, she says.
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