Real Estate Matters
The Hard Work of Finding a Good Match for a Mortgage Lender
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I 've received many e-mails lately from home buyers worried about finding a good lender.
Either they had a bad experience with their former lender or they're nervous because of all the news they've been reading about big banks writing down bad mortgage loans.
Choosing the right lender takes time, effort, lots of phone calls and maybe even a few hours online as you search through myriad companies and their loan programs.
This week and next, we'll explore how to figure out which mortgage is right for you and how to find a good lender.
The first step is to know what you want. There are a handful of basic mortgage programs. One important distinction is between fixed-rate mortgages and adjustable-rate mortgages, or ARMs.
With a fixed-rate mortgage, the interest rate is fixed through the loan term. Whether your loan spans 15 years, 20 years, 30 years or 40 years, the payment will be fixed. The only change will be if your property taxes or insurance payments go up or down and the lender requires you to pay more or less into your tax escrow account. (You generally can count on the payments going up, by the way.)
Interest rates on ARMs, on the other hand, can change. They may be fixed for six months or anywhere from one to 10 years. At the end of that initial period, they adjust based on a financial index to which they're pegged.
Typically, ARMs cannot go up more than one or two percentage points a year, and there is a lifetime cap on how high the payment can rise, typically five or six percentage points over the life of the loan. But some ARMs don't have that limitation on the first year the ARM adjusts, so the increase can be as high as five or six percentage points.
So if you get an ARM at 5.5 percent, and there is a six-percentage-point cap, the loan can never go over 11.5 percent. That sounds insanely high today, but back in 1989, the interest rate on the first home we bought was more than 11 percent.
Most other programs are variations on these two types.
Negative-amortization loans, also often known as "option ARMs," frequently start out at "teaser" interest rates that are typically several percentage points below the lowest market rate.
But you're not getting the deal of a lifetime. Quite the contrary. What happens is that the interest you should be paying -- but you're not because of the teaser rate -- is added to the balance of your loan.
