As everyone is obviously aware, the great mortgage crisis has impacted far too many people. Unfortunately, the culprit was greed and the fact that many of the people who fell into the problem were not alerted by the mortgage agents of the risks of the loans as well as the traps of the loans they were taking.
     There are few simple rules to follow when getting a loan. With the exception of CHFA loans, which are backed by the Connecticut Housing authority and the Federal Housing authority, if the rate looks to good to be true, it is. PERIOD
     When the rate is low, look at the closing costs first. Ask for a good faith estimate of closing costs. One of the items on there that is not always explained is the points. You see the points in your local newspapers where a list of banks quotes their rates. What is a point? It is a fee the banks charge to be able to lower the rate by collecting it up front. A point is 1% of the loan amount and therefore if the loan is 2 points, it is 2% of the loan amount. On a 200,000 loan, 2% is $4, 000, which is no small change. Though it may be worth it, if it reduces the payments that there is a decent payback period. For example, if that $4,000.00 results in your payment being reduced by $80 a month (this is just an example) than your payback period is 50 months and if you think you will be living there longer than that, it would be worth it.  The point is (play on words) to make sure you check what points are attached to the loan or rate, you are being given...
     Prepayment penalties are the real killer on many loans. Some of the less favorable lenders will start you off on an ok loan, usually a variable (not a fixed rate) as your credit may not quite be sparkling. They may have casually mentioned a prepayment penalty, which you are thinking,”hey, how am I going to pay this off in 2 or 3 years”. Well the fact is, when your rate starts to climb and either you need to sell or want to refinance, that is when it comes into play and many borrowers don’t realize it till the closing, when they find out about $8,000.00 in fees, they were not expecting.
     Avoiding it is simple; ask the lender if there are any prepayment penalties. If the answer is yes, run away. You do not know what will happen to you in the next 2-3 years, that may force you to sell and if you add up the commissions and other selling costs on top of a prepayment penalty, you may not be able to get out and are stuck with an escalating payment. If you are not ready for a mortgage, sit and talk with a good mortgage rep, who will tell you, how long it will be with clean credit to get into a standard conventional or government program. Sometimes waiting 1 year or less, with good credit, can put you into a low rate loan.
     Variables are not the evil they have become, if they are used right. If you plan to stay in the home you are buying for a long time, they are not the product for you. Rates on fixed are low now and it is nuts not to take advantage of it and lock it in. However, if you absolutely know, you will be in your home for a fixed time, be it 3, 5, 7, or 10 years, there are products out there by reputable local banks and lenders that will give you a lower interest rate with NO PREPAYMENT PENALTY. Always make sure on variables!!!
The rates are locked in for the 3, 5, 7, or 10 year periods and then become adjustable by the year. One of the local banks offers a 5/5 arm as well.
     PMI is another term that jacks up your payments. They are added on to a loan when you do not have 20% down. It is a fund that protects lenders against defaults and quite frankly, all you need to know is that it jacks up your payment. The only ways to avoid them are to have 20% to put down (not usually) or to do a blend loan. A blend loan can be used when you have less than 20%, your income does not qualify you for a government loan and when eliminating the PMI costs less than the higher 2nd mortgage on a blend.
     A blend loan works like this. The primary lender loans the 80% and based on what you can put down the secondary lender loans you either 5, 10, 15, or 20%. The secondary loan is at a higher rate. Warnings on the secondary rate are that some are interest only and have a balloon and you want to make sure there is no prepayment penalty. If you plan on paying extra into the mortgage, you want to pay off the secondary loan first to rid yourself of the higher interest rate and will end up with a regular interest rate with no PMI..
     There is usually a “best” program for all different types of buyers. Having a knowledgeable agent who will listen to your circumstance, can help as he or she can lead you to the lenders who have special programs for your situation. Then, you can take the “good faith estimate of closing costs” from each of the lenders and compare the closing costs and the payments and have the information to make a sound informed decision. There is no check you should have to write to anyone, until you actually find a home. Many of the costs, with the exception of the application fee and in some cases the appraisal fee, are paid at closing. You can expect closing costs and escrows to run you in the $5,000-6,000 range for an average home, more if you decided to pay points, the price of the home is high, or the taxes for the home are high.
     Escrows are the money the bank uses to pay the taxes and insurance on the property that are paid by the bank in many loans. To get the account started, some of the tax money and insurance money is collected at the closing, 3-6 months of taxes and insurance is the norm, depending on the time of the year and then you are making payments into the escrow throughout the year in even installments. On insurance, you usually pay one year up front, 3 months into escrow and then when renewal comes up, the bank will have the money from your payments to make the payment for you.
     Ok, you asleep yet? There is a lot to mortgage selection, but it is where you should start and almost as important as picking the right home as the wrong mortgage can cost you tens of thousands of dollars over the life of the loan, or worse yet, gives you bad surprises when you go to sell your home or refinance. New programs come up all the time and as real estate professionals, we try to stay on top of the latest products, which may benefit you.