Banks vs. Mortgage Brokers   (top)

Mortgage brokers are companies that sell mortgages for many different banks and lenders. They usually get a commission based on a flat fee or a percentage of the loan, paid by the lender. Brokers can be useful in quickly getting you a loan, because they represent many different types of mortgages, and one of them is bound to be ideal for your financial situation. Sometimes, the APR through brokers can be less expensive than going directly to the same bank yourself for financing, because in many cases the broker charges less for closing a loan than the bank's own internal salespeople.

Some great examples of online sites that are like a mortgage broker are LoanWeb and BestRate. What makes these sites so great is that they locate up to 4 banks that match your financial situation who are willing to write you a mortgage. It's a great way to get pre-approved without the credit check. They have a large database of lenders to ensure that most people will get an offer.

Pros:

You can get cheaper APR mortgages.
 

Sliding lock. If you lock in your APR through the broker, and the market interest rates drop, some brokers can get out of the lock and restart another lock for little or no extra fees. Many banks will not allow that type of practice when dealing directly with them. Some banks will allow you to re-lock, some will not, and some will charge a fee.
 

Can quickly find a loan that you would qualify for, whereas a bank might only have one or 2 loan types that you would not qualify for.

Cons:

They must courier papers back and forth to lenders, so postage charges can add up. It can be $200 in postage fees from one broker before your loan closes.

Many unscrupulous brokers out there who can steer you into the wrong mortgage. Just because you qualify quickly for a particular mortgage, does not mean it's the best mortgage for you to have. Some try to charge you fees, or put you into mortgages that don't allow early termination, or they have excessively high origination fees. These are issues you need to watch out for.

Where To Apply For Mortgages Online

Since your mortgage payment will most likely be your largest monthly expense for a LONG time, make sure to shop around and get the best deal possible.  Below is a list of reputable online sites where you can apply for a mortgage.  You should fill out the free application from each one and compare to see which gives you the best deal.  Maybe your local bank will have the best deal but you'll never know that a better deal was out there if you don't shop around.   Make sure that you get your credit report before applying for a mortgage, so that you can resolve any problems you find and increase your likelihood of getting approved.  Equifax now offers a credit report that includes your real Fair Issacs credit score which used to be hidden from you.  This score will really let you know how good (or bad) your credit is.  If your score is not as good as you had hoped, it is probably a good idea to get a merged credit report which has information reported by all 3 credit bureaus.

Don't be afraid about applying for a mortgage online.  Information transferred to secure sites is extremely safe and can not easily be intercepted by anybody so you should not be worried about information security.  You will find descriptions of some of the major online mortgage sites below.  Remember to get more than one quote so that you get the best deal and save the most money.

Most Common Mortgage Types   (top)

Fixed Rate Mortgage

With a fixed rate mortgage your interest rate is set prior to closing on your home and does not change for the entire term of the loan.   If you are approved far in advance of closing many banks will give you the opportunity to lock in the interest rate 2 - 3 months prior to closing.   Sometimes you may be able to lock further in advance for a fee, which is usually some percentage of a point.  A point is equal to 1% of the loan amount.  Locking early for a fee may be advantageous if rates are low and expected to rise. 

Pros Of Fixed Rate Mortgages:

You know what your monthly payment amount will be and it will not change. 

No worries about interest rate hikes that will raise your payments.

Cons Of Fixed Rate Mortgages:

Initial interest rate is higher than an adjustable rate mortgage.

If interest rates decline, it will not lower your payments.

If the interest rates decline significantly, you can refinance your mortgage to take advantage of the lower interest rate.  Refinance charges will be incurred, so the interest rate drop must be able to justify these costs.

You can get online quotes for fixed rate mortgages at LoanWeb, E-loan or BestRate.  Remember that a mortgage is an expense that will be with you for a long time.  If you are looking for a fixed rate mortgage you should apply at LoanWeb, E-loan and BestRate and see which one will give you the best deal.  A few dollars a month will really add up over 15 or 30 years.

Adjustable Rate Mortgage or ARM

With an Adjustable Rate Mortgage the interest rate will vary throughout the term of the loan.  How often the rate change depends upon the adjustment period of the loan. 

Pros Of Adjustable Rate Mortgages

Adjustable Rate Mortgages are initially priced at a lower mortgage rate than fixed interest rate mortgages. This will result in a lower initial payment.

The bank is willing to give a lower mortgage interest rate because it is "protected" from higher interest rates in the future.

Adjustable rate mortgages generally have a rate increase cap  (a cap is a maximum) per year and a lifetime cap on the interest rate. These are important details in an adjustable rate mortgage. It may be better to use an ARM when rates are up high, and they are less advantageous when rates are low. 

If you plan to be in a house for only 3-5 years, an ARM allows you to pay lower monthly payments for those 3-5 years than a fixed interest rate mortgage.

If interest rates drop, an ARM provides a way to participate in these lower rates without having to refinance your house. This can save you closing costs. 

The adjustment period is key to the loan. How often they adjust the payment is important because you want the longest adjustable period. Most decent ARMs have an adjustment period of one year, so your monthly payments remain the same for a year, then increase or decrease the next year.

Cons Of Adjustable Rate Mortgages

Interest rate hikes will increase the amount of your payments.

Since it is difficult to predict interest rates changes, it may be difficult to plan a adjustable rate mortgage payment into your budget.

If you have a cap over 2%, your monthly payments can go up significantly. Try to get the lowest cap you can.

Catch up clauses can come out of nowhere. If the cap was 3% and the rates rose 5%, they can invoke a "catch up" clause the following year, which can significantly increase your monthly payments.

Any time interest rates are adjustable, there is risk of volatility and increased monthly payments from the mortgage lenders. 

Avoid adjustable rate mortgages with negative amortization!

Be very weary of the word "discount" when looking at ARMs as this means that the loan will most likely have a shorter adjustment period which will lead to a higher cost in the long run.  This is similar to introductory rates on a credit card.

BE ASSURED THE RATES WILL RISE SHARPLY SOONER RATHER THAN LATER!!!

Just like fixed rate mortgages you should shop around for the best deal if you are interested in an adjustable rate mortgage.   You should get quotes from as many online sites like LoanWeb, E-loan or BestRate as possible.  When you compare the quotes make sure to pay close attention to the caps and other details that are unique to adjustable rate mortgages.

Other Mortgage Types   (top)

Balloon style Mortgage

A balloon style mortgage is a fixed rate mortgage. The interest rate on this type of mortgage is generally very low. Lower that the current going rate for a fixed rate mortgage. This interest and payment plan lasts a specified period of time, say 5 or 10 years. At that point the entire remaining amount of the mortgage becomes due in full. This type of mortgage is for people that plan on refinancing the mortgage before the balloon becomes due.

Pros Of Balloon Mortgages

Low interest rates, lower than the fixed rate mortgage.

Interest Rate doesn't change, until the balloon payment becomes due!

Cons Of Balloon Mortgages

You will be banking on refinancing. If interests go up to very high levels, or your financial situation changes, refinancing may not be possible.

Many people forget about the balloon payment coming up and are unprepared for it whent he time comes.

Reverse Mortgage

Be very careful with this type of mortgage! This is generally a type of loan that is used by elderly property owners who have their property paid off. It is a way to "unlock" the equity that they have built up in that property. A reverse mortgage is where the lender will pay you either a lump sum amount, or make monthly payments to you. The amount that you owe the lender increases over time, and no payment is due until the term of the loan is up. When the loan becomes due, the total amount paid to you, plus the interest on that amount becomes due in full. This lump sum payment is usually paid for by selling the property.

Pros Of A Reverse Mortgage

You can derive income from the equity of the property that you are living in.

Enhance the monthly income for retired people who plan on selling the property when (or even before) the loan term is up.

Monthly income derived from this type of mortgage is tax free.

Cons Of A Reverse Mortgage

If the value of the house decreases, you may be responsible for more debt than the house is worth.

The lump sum amount that is due when the loan term is up, is generally paid for by selling the property.

This is a very specialized type of mortgage and should not be entered into unless you know exactly what your doing!

No Document Mortgages (or Non Conforming Loans)

A no documentation mortgage is a mortgage which does not require any documentation of income,  verification from employers and does not require tax returns for a couple a years. If you can find a lender willing to give this type of loan, prepare to pay BIG interest rates.This is the loan of last resort!

Pros Of No Doc Loans

You can get a mortgage without the required documentation.

May be the only type of mortgage for some self employed individuals.

Cons Of No Doc Loans

Much higher interest rates!

You may have to put down a larger down payment amount (25%-30%) and pay more points at closing than other types of loans.

Seller Financing

Is usually in the form of a 2^nd mortgage and the seller is the lender on this 2^nd mortgage. Sometimes used in conjunction with a standard bank mortgage. Comes in handy For example when you need 20% to put down on a house and you only have 10%. The seller can finance the remaining 10%.

Pros Of Seller Financing

It's a great way to get a mortgage without a lengthy qualifying process, little or no fees, and possibly lower APR than traditional mortgages. 

By using seller financing to bring you over the 20% down payment level, you save money by not being required to purchase PMI.

Cons Of Seller Financing

You have to pay back the seller in 3-5 years, few will accept longer terms.

Some banks do not allow additional down payment dollars to come from family or other lenders.

The seller is 2nd in line if to get paid back if the house is foreclosed on.

Veterans Administration (VA) Mortgage
VA loans are insured by the Veterans Administration (VA). For more information about this government program visit the VA Home Loan site at http://www.homeloans.va.gov/

Pros Of VA Loans

If you qualify for VA mortgage, you may be able to get a larger loan for a larger percentage of the purchase price than with a conventional mortgage lender.

You can get a $0 down loan, and finance the entire amount of the purchase.

Cons Of VA Loans

There is extra paperwork and extra appraisal processing time associated with this type of loan.

In a good home selling market, where a seller mat expect several buyers, sellers may be reluctant to deal with purchasers that are using this type of financing.

If you are doing a VA (Veterans Administration) Approved Mortgage you need to have the following paperwork completed:

• A certified copy of your DD Form 214 "Certificate Of Release Or Discharge From Active Duty".
• Within about 3 weeks VA will send you Form 26-8329 (CG) "Certificate Of Eligibility For Loan Guaranty Benefits.

Federal Housing Administration (FHA) Mortgages
HUD helps people by administering a variety of programs that develop and support affordable housing. Specifically, HUD plays a large role in home ownership by making loans available for lower and moderate income families through its FHA mortgage insurance program and its HUD Homes program. HUD owns homes in many communities throughout the U.S. and offers them for sale at attractive prices and economical terms. Mortgages are insured by the Federal Housing Administration. For information on FHA loan and other Housing and Urban Development (HUD) programs visit the HUD web site at http://www.hud.gov/

Pros Of FHA Loans
For those that qualify for FHA mortgage, you may be able finance a  larger percentage of the purchase price than with a conventional mortgage lender.

Cons Of FHA Loans
There is extra paperwork and extra appraisal processing time associated with this type of loan. In a good home selling market, where a seller mat expect several buyers, sellers may be reluctant to deal with purchasers that are using this type of financing.

Other mortgage payment items:   (top)

Personal Mortgage Insurance (PMI)
20% down/equity and you don't have to pay this worthless expense!  PMI is insurance that you are forced to take out by the bank if you are putting down less than a certain percentage (usually 20%) of the total purchase price.  This insurance protects the bank from losses in case you stop making your payments.  The bank must drop the PMI once you have built up more than 22% in equity.  Stay on top of this and make sure they drop it when they are supposed to.  If your property appreciates you effectively have more equity in your home.  If this happens you should ask your lender if they will drop the PMI requirement based on the new value.  In order for them to drop the PMI they will most likely require an appraisal which will cost you around $250.

Tax Escrow
20% down/equity and you can pay your own taxes. This means that if you put down at least 20% or have built up 20% in equity the bank will usually let you hold the tax money in an interest bearing account until the taxes are due!

Insurance (Homeowners and Flood)
Most banks require you to keep homeowners insurance and flood insurance in escrow to protect their investment.  This way they always know that you have the insurance to protect the property that they are lending you money on. A good place to get online insurance quotes is InsureConnection.

Jumbo Loans
Loans that are in excess of an amount set by the Federal National Mortgage Association. This amount is presently set at $252,700 for a single-family home, or $323,400 for a two-family home in the continental US, in Hawaii and Alaska, the amount is $379,050 for a single-family home or $485,100 for a two-family home.  Most commercial lenders agree to use these guidelines, which are set by the Federal National Mortgage Association (Fannie Mae). Jumbo loans have higher interest rates and fewer financing options, and are also called non-conforming loans.

Some other definitions

Mortgage Term
The "term" or length to the mortgage is an important factor that must be considered when looking for a mortgage. Mortgages are generally 15, 20 and 30 years. Generally the shorter the term of the mortgage, the lower the interest rate will be. This is because the bank has less exposure to interest rate increases in the future. The shorter the term, the less chance of interest increases. The shorter terms mortgages will save you a large amount of money in interest payments. If you can not afford a shorter term mortgage, a large amount of interest and monthly payments can be saved by making extra payments towards the loan principle.