Mortgage Quotes – Make Sure You are Comparing Apples to Apples
Posted 1 November 2012 1:49 AM by Anonymous
Buying a home or refinancing a home is a major financial commitment. Since many mortgages are going to be paid for a minimum of 15 years, it is important to understand what a mortgage quote actually includes. Home mortgage lenders often provide a mortgage loan quote based on numerous factors. Three critical calculations determine the borrowers qualifications for a mortgage loan.
Debt-to Income (DTI) - DTI is the critical calculation for determining just how much house a borrower can afford. DTI is calculated by dividing total monthly expenses by gross monthly income. Expenses include all items in a credit report – mortgage, car payment, credit card minimums, property taxes and homeowners insurance. DTI is expressed as a ratio of x/y, for example 28/36. Depending on the lender and type of loan.
In order to qualify for a mortgage where the lender requires a debt-to-income ratio of 28/36:
Yearly Gross Income = $45,000 divided by 12 = $3,750 per month income
$3,750 Monthly Income x .28 = $1,050 allowed for housing expense
$3,750 Monthly Income x .36 = $1,350 allowed for housing expense, plus recurring debt
Credit Score - Credit Score results can have a direct impact on DTI. With a good credit score a borrower would be able to apply for most programs with a DTI of up to .50. A score of 620 or below can reduce DTI.
Equity in property, or Loan to Value - When a lender provides a mortgage quote, the equity in the property will play a role. The higher the equity, typically, the lower the rate. The calculation for equity is the current appraised value of the property divided into the amount of the mortgage loan. For example, if the home is worth $200,000 and the loan amount is $100,000, the equity is 50 percent. Lenders generally feel that the more equity there is in the home the less likely the homeowner is to default on the loan. Other key components in a mortgage quote include:
Type of mortgage - Mortgages used for a primary residence almost always have a lower interest rate than loans for investment properties or vacation homes. In most cases the lender feels that a homeowner who intends to live in the home is less likely to default on their mortgage.
Type of interest rate - While most consumers prefer a fixed rate loan, there are instances where an adjustable rate mortgage is a better option. ARMs often offer lower interest rates than fixed rate mortgages. There are of course some dangers with ARMs since an increase in interest rates will mean higher monthly payments. Fixed rate mortgages do not change throughout the course of the loan.
There are benefits and drawbacks to each type of loan. Fixed rate loans provide the homeowner a stable monthly payment. However, there may be times when an adjustable mortgage is more beneficial. Those who plan to refinance or sell a home within five years (or less) may benefit from an adjustable rate mortgage. The reason that ARMS may be more beneficial in these circumstances is they allow for lower monthly payments. Generally speaking, fixed rate mortgages do not have pre- payment penalty clauses while adjustable rate mortgages do. It is important to understand the full terms of a mortgage before accepting any loan, whether it is for a purchase or a refinance.
Length of mortgage - Generally speaking, the shorter the mortgage term the lower the interest rate will be. This is because the lender is taking less risk, therefore they charge less for accepting the risk. The amount of time that lenders are risking funds will have an impact on interest rates that a consumer is expected to pay.
Closing costs - Some mortgage companies will provide dual quotes for a home mortgage, one with and one without closing costs included. In some cases, this will have an impact on the nterest rate. The reason this will change the interest rate is that if closing costs are included, the loan to value is typically higher.
Additional fees - Direct lenders often offer lower interest rates than mortgage brokers because lenders often pay mortgage brokers by charging borrowers. Lenders may charge a “lock” fee to secure an interest rate while closing documents are prepared. In addition, both purchase and refinance loans will have an appraisal fee.
Last but not least remember, when comparing mortgage quotes it is imperative that you verify completely what the lender is offering. Review the mortgage quote fully to determine what fees are included to find out what factors may increase or decrease your interest rate. If lenders have not already retrieved your FICO score this could also have an impact on your mortgage quote. Making sure that you ask the appropriate questions of your mortgage broker or mortgage lender can prevent surprises at the closing table.
Let Embrace Home Loans walk you through your mortgage quote.