CHOOSING A LOAN

Choosing a Loan Program

The first step in getting a loan is deciding what kind of loan is best for you. When you apply for a loan, you'll need to have a program in mind so the lender can pre-qualify you for a specific interest rate and term . Many lenders use the terms "pre-approve" and "pre-qualify" interchangeably. You can change your mind about your loan program after you apply - but let your lender know as soon as possible.

Understanding the Loan Application Process

Buying a home may be the most exciting, confusing and stressful financial transaction you ever undertake. Even if you have done it several times you may find the process complicated and intimidating, particularly when it comes to getting a mortgage loan. Countless loan documents, unfamiliar terminology and uncertainty serve to temper the joy of buying a new home. As soon as the sales contract is signed, obtaining the financing for the purchase becomes paramount. If you understand the steps required to qualify for a mortgage loan, however, much of the stress can be reduced. The following explanation of the loan application process is intended to help you through the complexities of obtaining a mortgage loan.

The Loan Application Interview
Traditionally, once you had selected a lender, the next step would probably have been a meeting with a loan officer or other lender representative. Now, many lenders accept applications on the Internet or by phone, and you can gather loan information from the comfort of your home!

The total cost of a mortgage loan consists of the interest rate on the loan, origination fees, discount points and other miscellaneous charges. One point is equal to 1% of the amount of the loan. Points and fees are usually collected at the loan closing or settlement. The interest rate affects the amount of the monthly payment, while points affect the amount of cash you must have at closing.

Most lenders offer a range of interest rate/point combinations to meet your needs. In general, the higher the interest rate, the lower the points. For example, if the current market provides for a 6.5% interest rate with 2 points, a 7.5% interest rate may be offered at no points. If you are a first-time home buyer, the larger monthly payments on the 7.5% loan may be easier to handle than the 2 points that will require additional cash at settlement. The loan officer should explain all of your options to you.

When discussing the terms of the loan, make sure you understand how and when the interest rate and fees on the loan are going to be set. Most lenders will quote an interest rate and fee at the time the application is taken and then will guarantee, or "lock" the interest rate quote for a specified length of time. A rate lock protects you from rising interest rates while the loan is being processed, but it also typically commits you to close the loan at the interest rate and the fee even if interest rates decline prior to closing. Lock periods may run from 10 days to six months, with longer periods available in some cases at an additional fee. The lock period must be long enough to get you through the estimated closing date.

You may have the option to let the interest rate "float" getting the final interest rate and fees set nearer the settlement date. Before you take a floating interest rate, make sure that any rise in interest rates will not create a problem for you because you have insufficient income to cover the higher mortgage payments. In either case, make sure you understand exactly the terms of the lock-in agreement.

Evaluate fixed vs. variable interest rates with our interactive calculator