Finding the Right Mortgage

Finding the Right Mortgage

Long-term, fixed rates not necessarily the best option.

Homes listed for sale in the Northern Virginia market have been selling quickly for a few years now, making it difficult for potential buyers to find a new place to live.

For the lucky ones who make the winning bid on a home, one question looms large: how do I finance this major purchase?

Most turn to mortgages to finance their homes, and with the wide variety of options available, the process of finding the right plan can be almost as tricky as finding the right home.

“Interests rates on mortgages are still really low, hovering around 6 percent for a 30-year fixed-rate plan,” said Rick Eul, a mortgage banker with Bank of America in Annandale.

A fixed-rate mortgage is a plan that allows the borrower to make the same payment for the life of the loan, he said, based on the amount of money borrowed.

“People who are looking at the 30-year plan are doing so for the stability,” he said. “They will always be the most popular plan because you always know what that payment will be every month.”

However, the popularity of this traditional form of mortgage may be waning with the introduction of shorter-term loans, adjustable rates, and the interest-free loan option that was brought out in recent years.

As the name suggests, the borrower only pays the interest accrued every month for a fixed amount of time, be it three, five, seven or 10 years, Eul said. After that amount of time passes, the borrower begins to pay interest plus principal on the loan.

“This plan makes your money work for you,” he said. “It allows the borrower to put the money aside that would normally go to the principal of the loan by making smaller payments each month for a few years.”

In the long run, not much difference exists between paying nothing toward the principal on the loan for a few years because the interest on the loan will not accrue as quickly, he said.

It is crucial to talk with a loan officer before purchasing a house, he warned, in order to understand what the investment really looks like in monthly dollars.

“People need to look at their financial situation before getting a mortgage,” he said. “Loan and interest rates are impacted by credit, and everyone has a different perception of what a credit standing really means.”

MEETING WITH a loan officer prior to signing a contract on a house also allows the person to determine if he will be able to really afford the home he wants to purchase.

“Rental payment and mortgage payments are not exactly the same,” Eul said. “Payments on a purchased home will be higher but you’ll have tax advantages and will earn money in the long run.”

Additionally, a loan banker and a loan broker are different, Eul said.

“A broker works for the smaller agencies and sells the money banks have available,” he said. “A banker directly loans the bank’s money. Brokers shop around to find the best deal.”

For some homeowners, the sticker shock comes with the additional fees that are part of closing the sale of their new home.

“The biggest challenge is coming up with enough cash to complete the transaction,” said Kevin Connolly, a mortgage broker with Pinnacle Financial in Centreville.

“In the past, sellers have helped cover some of the closing costs, but in these days where they are receiving so many offers on their homes, they don’t have to,” he said. “The vast majority of homebuyers are going for 100 percent financing on their homes, which means their mortgage will also include the cash needed for the closing costs.”

Those fees can include charges from the lender, fees from closing the deal, any municipal taxes or charges, initial insurance on the home, surveying costs and possible other items.

“If you’re purchasing a $300,000 property, the closing costs can run between $7,000 and $8,000,” he said. “A zero-down program means there is no down payment and the lender is financing the sales price” into the loan amount, a practice that is also becoming more popular with lenders and their clients alike.

ANOTHER OPTION is called the cash-flow option A.R.M., which offers an adjustable rate with a low payment rate, sometimes around 1 percent of the loan amount. For example, on a $100,000 loan, the payment may be $1,000 per month but the interest is accruing at $1,005 per month, which will save the homebuyer in the long run.

“There is freedom of choice involved, so payments can be made at the lower rate, or only the interest can be paid off,” Connolly said. “The homeowner has the option every month of which amount he or she wants to pay. The rest of the money that would otherwise be going to the mortgage could go to paying off a higher interest debt or home improvements,” he said.

It is important for people to find “a loan officer with a conscience,” he said. “We ask clients all the time if they’re OK with the payment amount they’re assigned,” Connolly said. He has had some situations in which a person buys a home thinking he or she can afford it, only to call back a few months later after finding they cannot afford it and need to re-sell the home.

With the Federal Reserve meeting this week, some people may be watching the market to see if the predicted .25 percent interest rate increase will affect the housing market. Phil Drew of Carteret Mortgage in McLean, however, said there is no direct correlation between the Federal Reserve’s actions and the housing market.

“The mortgage interest rate is determined long before the Fed. meets,” he said. “It’s only when the change is unexpected or goes in a different direction than predicted that the mortgages rates shift.”

“Countless” factors do impact the mortgage interest rates, Drew said, but the most important is the bond market.

“If people are selling bonds and investing in other places, there’s less money around and mortgage rates go up,” he said. “Inflation is the biggest fear in the bond market, but Alan Greenspan [chief officer of the Federal Reserve] has said he doesn’t see any inflation at all.”

When stocks are being sold in favor of bond purchases, rates tend to drop because more money is available, Drew said.

PERSONALIZATION IS THE KEY factor when it comes to mortgages.

“If you’re calling around and someone gives you a quote without asking about your personal situation, you need to look somewhere else,” said Rick Askin, a broker with Pro Mortgage, a company based in Gaithersburg, Md. but which services the Northern Virginia area. “It’s important to find someone you feel you can trust.”

“Finding the right loan depends on a family’s personal priorities,” he said. “When rates were incredibly low, people were going with the fixed rates. Now that the rates are inching up, more are turning to the adjustable rate.”

Obtaining a loan only takes about 30 days from start to finish, but having a pre-approval letter before putting an offer on a house is crucial.

“If you don’t have an approval letter, in most cases your contract won’t even get looked at,” he said.