Take Your Time in Picking Lender, Loan
Once you have gathered up all the documents you’ll need to show your income and expenses and cleared up any blemishes on your credit record, you’ll be faced with two more key tasks:
Finding a good lender, and choosing the type of loan that’s best for you.
“You can’t just pick up the paper, look at a chart in the business or real estate section, circle the lender that’s offering the lowest rate and ask it for a loan application,” said David Seiders, an economist and lending expert for the National Assn. of Home Builders.
“You could be living with one lender and one loan for 30 years, so you can’t take your search lightly.”
Finding a good lender is a lot like looking for a good contractor. Relatives, neighbors and co-workers who have recently bought a home or refinanced and were happy with the lender’s services are among your best sources of referrals. Realtors and accountants can be helpful too.
For years, the best deals were usually offered by savings and loan institutions because S&Ls; specialized in making home mortgages.
But many commercial banks have since launched aggressive campaigns to increase their market share, so you’ll want to check with at least three of each if you’re looking for a loan today.
Include a few mortgage bankers in your search, too. Mortgage bankers can make loans on behalf of a variety of institutions, including pension funds and insurance companies, and often offer attractive terms.
Also check with at least three mortgage brokers. Brokers represent several lending institutions instead of just one, much like independent insurance agents represent several insurers.
Although you could do your mortgage-shopping by phone, it’s usually best to visit each lender and broker in person. But when you call to make an appointment, pay attention to how you’re treated: If the lender’s phone lines are constantly busy, or if the loan officer is rude or simply doesn’t return your calls, it’s a warning sign that the company may have lousy customer service.
“If you’re treated poorly when you apply for a loan, what makes you think that you’ll be treated any better if you eventually have a problem with your mortgage?” said Dennis R. Eickhoff, president of Advanta Mortgage Corp. in San Diego.
Eickhoff said it’s important to visit prospective lenders personally because it gives you a better idea of their professionalism and fosters a dialogue that could make the difference between getting the loan and getting turned down.
“A lot of people who call on the phone just want to know one thing--the interest rates on our loan,” Eickhoff said. “But there are an awful lot of other things to consider.”
For example, Eickhoff said, a hypothetical borrower who simply chooses a lender based on a few phone calls and proceeds to handle the transaction only by mail might get turned down because her income wasn’t quite high enough to qualify.
But if she visited the lender’s office and spent some time explaining her personal financial situation, she might have learned that the $200-a-month rent payments that she collects from her live-in daughter could be listed as “income” on her application to boost her chances of getting the loan.
Once you have finally settled on which lender or broker to use, you’ll probably have a good idea of which type of loan is best for you.
About 65% of all borrowers today are choosing loans that carry a fixed interest rate, compared to only 35% three years ago. Most of these borrowers are opting for conventional, 30-year terms.
There’s no mystery to the renewed popularity of these “plain-wrap” loans: They’re easy to understand and rates on them are in the 8%-range, among the lowest in two decades.
Most borrowers also like the comfort of knowing that their monthly payments will never change.
On the downside, fixed-rate loans are usually a little harder to get than adjustable-rate mortgages. That’s because rates on fixed mortgages are higher than introductory rates on ARMs, so you have to earn more to qualify for a fixed.
In addition, borrowers who opt for a fixed-rate loan will be sorry if interest rates decline even further.
“The only way they could capitalize on another rate-drop is to spend a lot of money to refinance,” said Steve Eglash, a mortgage broker and partner of Rockland Financial in Sherman Oaks.
Borrowers who instead choose an ARM don’t have that problem: If overall rates drop, their loan rate typically drops too.
In fact, some experts say that the recent uptick in fixed rates has given adjustable-rate mortgages new luster.
Many lenders are now offering ARMs with introductory rates as low as 5% and with caps that prevent them from rising more than five or six percentage points over the life of the loan.
“If you get a 5% ARM with a six-point cap, your rate can never go above 11%--and that’s not much higher than today’s fixed rates,” Eglash said.
Rates on ARMs are adjusted periodically based on changes in a given index. Most lenders offer loans tied to a variety of indexes and will let their borrowers choose which index they want for their loan.
The most popular index in California and many other states is the 11th District Cost of Funds, a composite figure that reflects the rates that western savings institutions pay on a variety of accounts.
The 11th District COF is one of the slowest-moving indexes, an important point to remember if you don’t want wild swings in the amount that you’ll have to pay each time your interest rate is adjusted.
If you can stomach wider swings when your payment is adjusted, you might want to choose an ARM linked to more volatile indicators, such as the prime rate or the one-year Treasury-bill index.
These indexes react much more quickly to changes in the overall interest-rate environment: Your loan payments will rise sharply if overall rates go up, but should fall just as fast if interest rates drop.
It’s important to ask what kind of margin, or “spread,” the lender will charge on your adjustable-rate loan. A margin is basically the bank’s retail markup: If the index rate is 7% and the lender’s margin is two percentage points, your interest rate will be 9%.
ARMs are especially attractive to today’s first-time buyers, broker Eglash said, because their low initial rate makes it easier to get the loan.
But even many “move-up” buyers now find ARMs alluring--especially if they’re planning to stay in the house for less than four or five years--because they’ll benefit from the ARM’s below-market rate in the early years of the loan and sell the house before the rate can shoot skyward.
Of course, you won’t want an adjustable-rate loan if you can’t sleep at night knowing that your loan rate could change. But even if you opt for a fixed-rate loan, you’ll still have plenty of options.
* Fixed-rate, 15-year mortgages. These loans have several advantages over their 30-year counterparts. The shorter term actually cuts your overall interest charges by more than 50%, because your repayment period is shorter and rates on 15-year mortgages are typically a bit below those on 30-year loans.
A 15-year term is especially attractive to younger buyers who want to pay their loan off before their children grow up and start college. But they also lure older buyers, who want to own their home “free and clear” before they reach retirement age.
Qualifying for a 15-year mortgage is a little harder than getting a 30-year loan, in part because the shorter pay-back schedule results in a monthly payment that’s about 20% or 30% higher. If your finances will be tight, you might want to choose a 30-year term to minimize your monthly housing costs.
* “Balloon” mortgages. There are several variations of balloon loans today: Each kind has its unique advantages and disadvantages that you must discuss with your broker or loan officer.
Monthly payments in a typical balloon arrangement are based on a 30-year schedule but the outstanding balance of the loan must be repaid in a lump sum within five or seven years.
Since the lender knows that it will get its money back sooner, it will offer you a rate that’s about a half-point lower than rates on conventional 30-year loans--a break that can easily lower your payments by $50 or more every month.
“Balloons are great for people who are sure that they’ll be moving within a few years,” said William Brewster, a lending expert with the Mortgage Bankers Assn. of America.
“You see a lot of first-time buyers choose them, because the lower rate makes it easier to qualify and leaves a little more money in their pockets.”
If you’re thinking of getting a balloon loan, ask your lender if it offers an “extension” clause that will let you avoid having to come up with a lump-sum payment if the loan comes due but you don’t want to move or refinance.
Some lenders offer these clauses, although they usually reserve the right to adjust your rate to market levels when the extension is granted. Others flatly refuse to provide such an option, which means you would probably have to sell the house or refinance the loan when the term of your balloon loan expires--an ugly job if the resale market is slow or interest rates are high.
* The “3/2” loans. This offbeat loan was developed by the Federal National Mortgage Assn. about a year ago. It’s especially designed for cash-strapped buyers who are getting part of their down payment from their relatives--a situation that makes some lenders nervous.
You can borrow up to $202,300 under the 3/2 program as long as you are credit worthy and put at least 3% of your own money toward the down payment. A relative, employer or nonprofit group must put up at least another 2%.
Some of California’s biggest lenders offer 3/2 loans, including Countrywide Funding Corp., First Nationwide Bank, Directors Mortgage Loan Corp. and Imco Realty Services.
Of course, it’s impossible to list every single type of loan being offered: The lending industry is constantly introducing new types of mortgages and improving its existing ones.
That’s all the more reason why you’ll want to visit several lenders to see what they have to offer and which loan is best for you.
Meet David Myers
Times staff writer and “Your Mortgage” columnist David W. Myers will take part in a panel discussion and answer consumers’ questions on housing finance issues at today’s final session of the Los Angeles Times’ 1992 Home Buyers and Sellers Fair.
The fair will be held from 9:30 a.m. to 5 p.m. today at the Los Angeles Convention Center. For details, see page K9.
