The ‘Ins and Outs’ of Mortgage Finance

As mortgage rates continue to dive lower, many homeowners find themselves exploring opportunities to refinance and first-time homebuyers are deciding whether or not this is a good time for them.

This leads many to explore the uninviting world of mortgage finance. The intent, below, is to provide a good outline or what to look for and what pitfalls to avoid.

Everyone always asks for the interest rate but this is probably the worst question you can ask. Instead, ask for the APR (Annual Percentage Rate). The APR represents your actual cost of the loan, including closing costs.

Believe it or not, you can select a range of rates that meet your needs. If you select the lowest interest rate, you will pay more closing costs. If you select the highest interest rate, you will actually get money toward your closing costs. For most people, the ideal answer is to select the interest rate that does not increase costs but does not provide money back (the “no points” interest rate).

What is a point?

We have all heard this term “point” thrown around with respect to mortgages. The “point” represents a one-time fee paid at closing which is expressed as a percentage of the loan amount paid. For example, if you are paying 1 point on a loan amount of $300,000, your additional fee at closing is $3,000 (1% x $300,000). Since most people do not have a great deal of excess cash to spare when buying a home, many choose the “no point” option.

The most challenging aspect, in applying for a loan, involves understanding all of the fees. Without getting into too much detail, most of the fees will be charged by third parties. For example, New York State charges a mortgage tax on the amount of money you borrow, which varies by county.

You are required to obtain title insurance which protects both you and the bank in the event there was an error with respect to the title. The bank will charge you a fee to run your credit report, review your loan, and review your documents. The best way to protect yourself is to obtain a Good Faith Estimate when you meet with a loan officer; this is required by New York State. The Good Faith Estimate is a run down of all of the fees the lender anticipates at closing. The number is not exact but provides a reasonable estimate to use in shopping for a loan.

Tips for shopping and closing

• Prior to shopping for a loan, you should obtain 2 years of tax returns, 1 month of paystubs, and a recent statement for each bank/investment account
• Visit a site like bankrate.com to see the prevailing mortgage APRs
• Ask each lender for their APR and a Good Faith Estimate
• On the Good Faith Estimate, you can see if the lender is charging you “points” by looking at the lines that say “discount fee” and “origination fee”. If there are any charges on those lines, you are being charged points.
• Bring your Good Faith Estimate to closing and compare it to the closing document (called the HUD-1)

Overall, mortgage finance is quite complex and requires the use of a mortgage professional. If you follow some of these tips and visit the New York State Department of Banking’s website (http://www.banking.state.ny.us/brsm.htm), you will make a smart financial decision at a low cost.

Frank Melacccio is a director at an insurance company.