Arranging financing to buy a house is crazy. We don't do it very often, so we don't have much chance to get better with experience. The limited selection, huge consequences, and time pressure make it very hard to make good decisions.

The Consumer Financial Protection Bureau has great information about the whole process, as well as scams to watch out for. The smart shopper will study and consider all this in advance. People like me will click around for ten minutes, then switch to Is This Prime? or Will you drown? Following mk is productivity poison.

Below are some notes on comparing loan offers to make it easier for me to cram Mortgage 101 at the last minute next time.

CFPB makes the sensible suggestion to get loan offers with the same parameters, so you can compare apples to apples. But if both loans are the same, it doesn't matter which one you pick. The key is to figure out which parameters you care about so you can ignore everything else and compare what matters.

Start with a budget. This includes (1) the amount of cash you have available for a down payment and other closing costs, and (2) the size of the monthly payment you are comfortable with long term.

A fixed rate, rather than adjustable, makes planning and comparing much simpler. You should also decide on a term, 15 or 20 or 30 years, before you request offers. Stretching the loan out longer makes monthly payments smaller, but the interest rate will be higher, and have longer to accumulate, so you'll pay more interest. You should have the option to prepay (make extra payments to reduce the outstanding debt) without penalty, so it's safer to give a little cushion with a longer term rather than maxing out the monthly payment with a shorter term.

I thought I would compare at least three offers, but even comparing two was so grueling I never applied for a third. I went with Corporate Megabank, where we already have longstanding accounts, and Crazy Eddie Dot Com, the nimble web-based lender that promised to "crush" Megabank, even claiming that Megabank buys loans from them.

Both offers had the same loan amount and term. But the interest rates were different. In fact, the rates were not even final, even though we "locked" the rate. Locking the rate meant locking the entire menu of options available at that time so I could switch to any of the other offerings during the lock period. In practice, once the rate was selected both lenders were reluctant to change it, and I was already sufficiently drowning in paperwork, so I compared two offers with slightly different rates.

The difficulty was that the two lenders had used different estimates for things like property taxes, insurance, and title costs. One lender estimated HOA fees even though there was no homeowners association.

I eventually created a simple worksheet, scribbled on a notepad, that helped me make a fair comparison of the numbers I cared about. These all came from the loan estimate form.

Loan amount How much you're borrowing.

Interest rate This determines the interest. (The APR is a complicated measure of total loan costs.)

A and B - Upfront costs: what the lender is charging you to make the deal happen. Called points, processing fees, origination fees, or whatever, it all means dollars going from your pocket to the bank. More of these up-front costs should mean a lower interest rate, and vice versa. But this is also where the bank tries to extract whatever it can, and where a backup offer gives you the most leverage. Section C shows "services you can shop for" if you are motivated and have time. If you go with the lender's choices, you might want to include these costs with A and B.

P&I - This monthly cost is determined by arithmetic, not the lender, based on the loan amount, term, and rate. You can check it with an online mortgage calculator or a spreadsheet formula:

  =-pmt(3.875%/12, 30*12, 162000)

gives $761.78 as the monthly principal and interest for a loan of $162,000 over 30 years at 3.875%.

Mortgage Insurance - An extra monthly cost lenders say they require while you owe more than 80% of the value of the house, worth wriggling out of if possible.

The lifetime costs below are not as useful, since most people will refinance or pay off their loan when selling after a few years.

Total P&I Multiply the monthly P&I by the number of months in the term

Total M.I. You can cancel mortgage insurance after reaching 20% equity. The Projected Payments section of the estimate shows how many years this should take.

You should end up with two numbers for each lender: the amount you will pay up front to the lender and the amount you will pay each month to the lender. For mortgage insurance (PMI) this might apply for a few years, and should be cancelled once the equity requirement is met, but I don't know how automatic that is.

The Loan Costs section of the estimate (A, B and C) was a confusing part for me, and one of the few openings for a lender to perform marketing. Eddie boasted of no origination fee, underwriting fee, or processing fee. But he charged almost a full point (one percent of the loan amount) in section A, Origination Charges.

You should ignore the Other Costs section. It includes things like taxes, government fees, and HOA dues that the lender has no control over and you will pay anyway. To maximize confusion every loan estimate shows a random number of months to prepay each of these costs into the escrow fund, so the numbers jump up and down with each estimate even for predictable costs like property tax. Owner's Title Insurance seems like a scam but you'll wish you had it if you need it. Real estate people say you need it. It's like the additional coverage at the car rental desk, who knows?

The lenders know it's hopeless to try and get borrowers to reach any clarity, so they focus on the Cash to Close and the monthly payment. Of course you need to be sure you don't come up short at settlement and can swing the payments, but these two numbers don't tell the whole story. Just like with dealers who want to sell a car based on the maximum monthly payment you can afford, you have to keep the conversation focused on the rate and the fees in A and B and C.

Disclaimer: I have no idea what I'm talking about. I faked my way through and just wanted to make some notes so I would feel a little better about it next time.


cgod:

We had a nonprofit that helps first time home buyers take a look at our loan options and select the best offer. They also checked to see if we were eligible for any government programs (we made. Little too much to qualify).

We also took a class on first time home buying from the same organization which was helpful.

If you can get out of the insurance, do it. Borrow from family or friends, it's a lot of money.


posted by wasoxygen: 14 days ago