What We Want In A Loan

I do not understand why a mortgage is considered a hallmark of the American dream. It is essentially debt, with your very house as collateral to the banks until it is paid off many years down the road. To measure economic progress by how many people have mortgages is foolish; rather, we should be counting those that fully own their homes, having paid off these mortgages!

As much as we hate debt, we decided this was "good debt" that would help us get into our own home, rather than continue to bleed thousands in an apartment situation. So after finding a realtor and starting the search for a home, we also began looking for a mortgage lender. Some rules we followed that made it an easy process:

(1) Ensure you have an excellent credit score. Ours range from 760 to 790 from all 3 credit agencies, mostly built through a credit card we pay off every month. This was good advice from a friend when we first got married, that we should start building credit at least 2 years before planning to purchase a home.

(2) Ensure a low debt ratio by minimizing other debts you have (or earning more income). We practically have no debt except the revolving credit card mentioned above.

(3) Educate yourself about how mortgages work, and choose the right one for your situation. We chose a 30-year fixed conventional loan. We'll be retiring empty-nesters when this loan is finally paid off, but we plan to try and pay it off in less than 20 years.

(4) Aggressively save for the down payment, if your loan requires it. We started saving about 2 years ago, intending to pay 15% or even 20% down. Some lenders offer different interest rates depending on what bracket of down payment you fall in (5/10/15/20%). Most lenders have a flat rate regardless of the down payment, but will instead have steeper PMI rates.

(5) Know how much your monthly expenses are, and what proportion is currently spent for housing/rent. We have the data of all our spending over the last 2 years, so it was easy to see what our reality is. We spend about $1200/month for rent in this apartment, which is our psychological upper limit for a mortgage payment.

(6) For the houses you are considering, have an idea what the property taxes were last year. The MLS listing usually provides this data, but you can also query the county assessors. The houses we've been interested in have ranged from $800 - $1300/year.

(7) For the houses you are considering, also know about how much annual home insurance you might expect to pay. A quick way to determine this is to multiple the house list price by 0.0051 (statistical estimation of data from 3 insurers on 5 properties).

(8) Find a reputable lender. Whoever you contact, make sure you ask for an estimate and pre-qualification, giving them your credit scores to use so that you don't divulge too much personal information upfront. You also don't want too many hits against your credit at this time. But know that whichever lender runs your credit must send you a statement showing the FICO scores they pulled and used to determine your terms. So let one run it and furnish it to other lenders.
Online and out-of-state lenders are just as good as banks and local brokerages since everyone eventually sells your mortgage to the government. Until a week ago, I was considering a lender from North Carolina that I found online but eventually decided to go with Ent Federal Credit Union, who actually finance their own loans.

(9) In terms of who offers better deals, the order is such: credit unions, direct lenders, mortgage brokerages, and finally banks. Ask around and read the reviews about any institution you feel interested in. It is true that there are scams and bait-and-switch situations out there, so be very discerning. It look me 2 weeks to decide on 5 good lenders.

(10) With the house list price, property taxes, homeowner insurance, and desired total monthly mortgage payment, you can crunch the numbers on how much loan you can afford. We started our search thinking we could afford a $250,000 home but through this exercise settled in the $230,000 or less range, with a 15% down payment.

(11) When you speak with a lender, you want to know their 0-point interest rate for each of the down payment brackets, and their mortgage insurance rates for each down payment bracket. With this, I initially judged a good loan as one that has the lowest payment (P+I).

(12) If you additionally consider closing fees (excluding all title fees, processing fees, and appraisal fees) and the lender's escrow requirements, the best loan may be one with the lowest out-of-pocket at closing cost. ENT has high closing/origination fees (around 1% of loan value) but offers some of the lowest 0-point interest rates. Direct lenders have no or little closing fees beyond the usual processing charges.

(13) Take advantage of rate buydown, where you pay a certain percentage of the loan value (called "discount points") to have the interest rate reduced. A low interest rate translates to low monthly payments, so if you can afford the upfront cost, you get a better deal in the long run. Besides, this pre-paid interest is tax-deductible. The law allows up to 5% of loan value in discount points, or the loan is considered "high-cost", which is governed by slightly different rules.

(14) Keep an eye on national interest rate trends. The rates change on Mondays and are the same the rest of the week. Some lenders can offer you a rate lock-down, but it might cost you: they will run your credit and do some underwriting. Even so, the lock lasts anywhere from 30 to 45 days, and depending on the rates when the lock expires, it may be extended.

I noticed a strange correlation between how high the Dow Jones opens on Monday and whether mortgage interest rates will change. If the markets open considerably higher, it is very likely that mortgage interest rates will go up that week. So I requested my rate lock last week after 2 consecutive big opens on Wall Street. No science to this practice, but I might have scored.

We locked in at the bought-down rate of 3.875% (1 discount point), which put our monthly total mortgage payment anywhere between $1000-$1100 (including principle, interest, mortgage insurance, property taxes, and homeowner insurance) for the few houses we are interested in. This is obviously less than our current apartment rent, so our overarching goal is achieved. As a matter of good faith, I requested a counter-offer from the other lenders I was considering, and none could beat it. So we rest this case.