Your choice of mortgage lender or broker, as well as type of loan itself, will influence your settlement costs and your monthly mortgage payment.
Mortgage lenders and brokers
A loan originator is a lender or a mortgage broker
Mortgage brokers. Some companies, known as “mortgage brokers,” may not make loans themselves but will offer to find you a mortgage lender willing to make you a loan. Mortgage brokers typically are paid through fees charged to you at settlement or through a higher interest rate that reimburses the lender for compensating the broker. Mortgage brokers are not required to find the best deal for you unless they have contracted with you to act as your “agent” or representative, or they have a duty to do so under state law.
Lenders. A lender typically makes loans to borrowers directly. A lender receives payment through fees charged to you at settlement, payment from interest when you make your monthly mortgage payments, and payments if they sell your loan or the servicing of your loan after settlement.
Note: Whether you apply for a loan with a lender or mortgage broker, you should receive Good Faith Estimates (explained below) of settlement costs from multiple loan originators to make certain you get the best loan product at the lowest interest rate and lowest settlement costs.
Types of loans and programs
Shopping for your loan is probably the most important step in your home-buying process. Mortgage brokers and lenders have a wide variety of mortgage products. The type of loan product and your interest rate will not only influence your total settlement costs but will determine the amount of your monthly mortgage payment.
You may be eligible for a loan insured by the Federal Housing Administration (FHA), guaranteed by the Department of Veterans Affairs (VA), or offered by the Rural Housing Service (RHS). These programs usually require a smaller down payment. Ask your lender or mortgage broker about these programs. You should shop and compare quotes from different loan originators because each may offer different rates and loan terms.
If you are a first-time home buyer, ask your real estate agent/broker and loan originator about the availability of local or state programs such as reductions in transfer taxes, special income tax deductions, or state homestead exemption discounts.
Types of mortgages
Two of the most common types of mortgage loans are fixed-rate mortgages and adjustable-rate mortgages. The interest rate on a fixed-rate mortgage will remain the same for the entire life of your loan while the interest rate on an adjustable-rate mortgage (ARM) may adjust at regular intervals and may be tied to an economic index, such as a rate for Treasury securities. When the interest rate on an ARM adjusts, it may cause your payment to increase.
Some adjustable-rate mortgages allow the borrower to pay either the “interest only” or less than
the “interest only.” In both options, none of the mortgage payment is applied towards the loan balance (principal). In a less than “interest only” option, the unpaid interest is added to your loan balance and you can owe more than the amount you initially borrowed, even if you make all your payments on time. This is called negative amortization. If you are a first-time borrower and your mortgage could result in negative amortization, your lender is required to make sure you get homeownership counseling before you borrow the money.
When the loan balance increases to the maximum amount, the loan is “recast” and your loan payment may double or even triple. When faced with “payment shock,” you may discover too late that the loan payments no longer fit within your budget and that the loan is difficult to refinance. You may then be in danger of losing your home.
Warning: Choosing an ARM product could affect your ability to pay your mortgage in the future, resulting in loan default or foreclosure. You need to become familiar with the features of ARM products to find the one that best fits your needs. If you decide to obtain an ARM, consider obtaining additional information. Additional information may be found by contacting the CFPB.
Taxes and insurance
In addition to the principal and interest portion of your mortgage payment, you will have to pay property taxes and insurance to protect the property in the event of disaster such as a fire or flood.
Based on your down payment, you may also have to pay mortgage insurance. Your lender may require an escrow or impound account to pay these items with your monthly mortgage payment. If an escrow account is not required, you are responsible for making these payments when they become due and will need to budget for them in addition to your monthly mortgage payment.
Mortgage insurance may be required by your lender if your down payment is less than 20 percent of the purchase price. Mortgage insurance protects the lender if you default on your loan. You may be able to cancel mortgage insurance in the future based on certain criteria, such as paying down your loan balance to a certain amount.
Before you commit to paying for mortgage insurance, find out the specific requirements for cancellation. Mortgage insurance should not be confused with mortgage life, credit life, or disability insurance. These products are designed to pay off a mortgage in the event of a borrower’s death or disability.
Homeowner’s (hazard) insurance protects your property in the event of a loss such as fire. Many lenders require that you get a homeowner’s policy before settlement. Flood insurance will be required if the house is in a flood hazard area. After your loan is settled, if a change in flood insurance maps brings your home within a flood hazard area, your lender or servicer may require you to buy flood insurance at that time.
The experts at Choice Lending Group can help to explain all of this and answer any questions you may have when shopping for a loan. We can help you explore all your options, and customize a loan to fit your current and future needs. Call or email us today, (877) 777-1203.