Once you have signed a contract for the purchase of your new home (or condominium or cooperative apartment), and assuming that you do not have all of the cash in your bank account, you will need to obtain a mortgage loan.
There are many different loans on the market — and many different loan programs from which to choose. You should contact at least three different lenders, and ask them to give you a list of the loans which they can offer you. Take careful notes, and remember one important thing: do not give any lender any money until you are absolutely certain that this is the lender – and this is the loan – you want to obtain.
Under the new mortgage lender rules issued by the Consumer Financial Protection Bureau CFPB), it is actually very easy to shop and compare.
Oversimplified, the three basic loan programs are as follows:
1. Conventional: this type of loan in generally available from a bank, a mortgage broker, or a credit union. Within the category of conventional loans, there are various options available, such as a fixed 30 year loan, or an adjustable rate loan (called an ARM).
ARMs adjust on a periodic basis, although in most cases they will run for a period of thirty (30) years. Generally speaking, the shorter the term of the adjustment (such as a one year ARM) the lower the initial interest rate will be. However, when the adjustment period comes around, the interest rate for the next adjustment will either go up or down, depending on the economy at the time of the adjustment. When interest rates are falling, an ARM seems like a good deal. However, when interest rates are rising (as it appears they will be increasing as early as the end of this year), the consumer who obtains a one-year ARM is almost guaranteed to see the interest rate hike as high as 2 percentage points at the end of the first year.
This is not a complex issue, and all lenders are now required to provide you with a written explanation of the way their particular ARM works. Read it carefully and seek assistance from your financial and legal advisors if you have any questions
2. VA Loans: This type of loan is generally available from mortgage brokers, it is called a VA loan, since only military veterans can obtain such loans. They are guaranteed by the Veterans Administration. There are certain conditions which you must meet if you want a VA loan, and you should make sure that your potential lender provides you with all the details, up front.
3. FHA loans: This loan is insured by the Federal Housing Administration. FHA will guarantee the lender against a default by the borrower, but the borrower will have to pay an insurance premium for this coverage. Once again, there are conditions which must be met before such loans can be obtained, and you should discuss all these terms with the potential lender.
It is not possible in a short article to fully discuss all the various mortgage loans on the market. Furthermore, creative lenders are always coming up with new programs in an effort to be competitive. However, not all these loans are in your best interest.
You should shop around, and don’t accept the first loan that is offered. While the real estate agent and often the seller may give you loan information – and the name of potential lenders – only you can make the final decision as to what is best for you. After all, remember that the life of the loan may be as long as 30 years – and that’s a long time to be stuck with an uncomfortable loan.
For more information, go to www.consumerfinance.gov, and search “Know before you owe”.