Click Your Way To A Mortgage
You're frantic. You're in hot pursuit of your dream house, but the longer it takes to find it, the higher the mortgage rates--and real estate prices--are heading. If you're willing to forgo a conventional 30-year fixed-rate mortgage, though, you can find ways to keep your interest rate in check. And with all the mortgage information now available on the Internet, you have a good shot at pinpointing the best loan, one with a monthly payment that both you and your lender can live with.
The rate for a 30-year fixed mortgage now averages about 8.5%, according to HSH Associates, a Butler, N.J., financial publisher that collects rates from mortgage lenders. That rate includes so-called nonconforming loans, those above $252,700, which run as much as a half-point higher. For borrowers trying to outrace the rise, it's stomach-churning, up from a 30-year low of 6.9% in October, 1998.
NAME YOUR TERMS. These days, the best place to start researching a mortgage is the Internet. For one thing, you can get quotes that are more current than those in the Sunday paper, an important edge when interest rates are volatile and lenders are adjusting rates twice or more a day. Better yet, you can ask for quotes on properties you're considering by typing in the asking price and the down payment you can afford. You'll get back a flood of proposals at different rates, including some from lenders you would never think to check.
If you haven't started looking yet, you might start with a general real estate site, like Microsoft's HomeAdvisor or iOwn. They start you off with information you need to begin your search, such as referrals to real estate brokers and ratings of school districts. But they have all the lending resources on their sites to take you through closing on the property. Other sites, such as Quicken.com or LendingTree, specialize in loans. The major mortgage lenders offer their portfolios through these sites, and most have Web sites of their own as well.
Common wisdom has it that you get anything cheaper over the Internet, including mortgages. But wide variations in fees at closing make it difficult to tell. There's no question that Web lenders are slashing their fees to stay competitive. And that can serve as a lever when negotiating with conventional lenders and mortgage brokers.
Many Internet lenders claim to waive application fees, or offer cash rebates at closing. And there are Net-only mortgages for borrowers with stellar credit, such as Countrywide Home Loans' (www.countrywide.com) Gold Credit, which discounts closing costs by 1.25% of the loan amount.
Priceline.com, which lets you name your own mortgage terms and bills your credit card $200 if it can match them, is rolling out a program with LandAmerica Financial Group, a title company, guaranteeing your maximum closing costs before you submit your request. "Over the next three or four years, the Internet will make all of the fees transparent," says James P. Smith, vice-president of Internet business strategy at Wells Fargo. "The borrower will have control of all the information."
All the Internet sites offer the financial tools to tailor a mortgage to your own personal situation. Let's say you want to keep your monthly payments, including insurance and taxes, at no more than 28% to 36% of your gross income, as lenders require. Should you ante up a bigger down payment? Or should you pay extra points up front, to buy down the mortgage interest rate? Should you opt for a shorter or longer term? A 15-year term will give you about a half-percent break on the interest rate, although your payments will be higher. A mortgage loan that stretches out 40 years will lower your monthly housing bill by spreading payments out longer. Experts recommend that only for the truly strapped, and only as a temporary measure.
CONVENTIONAL OR ADJUSTABLE? Perhaps the biggest question borrowers ask when interest rates rise is whether to get a conventional 30-year mortgage, or give up the peace of mind and go for a more affordable adjustable rate or balloon mortgage. "Most people reflexively go for a 30-year fixed-rate loan, and they're paying a premium price to get it," says Ray Brown, co-author of the best-selling Home Buying for Dummies. "Instead of paying the lender to take on the risk for 30 years, you should only be asking for the period you plan to keep the mortgage." In other words, a 30-year mortgage is okay if you plan to stay in the house for the long haul. But if you're like most Americans, who move an average of once every six years, or if you figure you can someday refinance the loan at a lower rate, you should look at other options.
That thinking accounts for the popularity of adjustable rate mortgages, called ARMs, or hybrid mortgages, which account for about half of the mortgages written today. They let you choose an initial period of 1 to 10 years during which the rate is fixed. After that, the rate is adjusted annually to move with a cost-of- funds index, such as the one-year Treasury bill rate. You are still protected from wide interest-rate swings: The adjustment usually is capped at plus-or-minus two percentage points a year and five to seven points over the life of the loan. Right now, with the average 30-year fixed mortgage at 8.54%, the average 1-year ARM IS 7.04%, and the 3-, 5-, 7-, and 10-year versions fall in between. At those rates, monthly payments on a $200,000 loan range from $1,544 for a fixed-rate 30-year term, to $1,336 for a 1-year ARM.
LOCK IN RATES. If you're ready to buy but afraid that interest rates will continue to rise, you can lock in today's rates for 30 to 45 days for about an eighth- to a quarter-percent of the mortgage. If you're further away from a decision, you can extend that rate lock for an additional fee. One good bet is a new rate lock that promises you the prevailing rate at closing, even if it's lower than when you committed to the mortgage. Bank of America charges about a half-point up front for a 90-day "float-down" lock, but applies the charge toward the closing costs. It costs you nothing, but usually guarantees that BofA gets your business.
The most conventional way to reduce your monthly housing bill is to pay points up front in order to ratchet down the interest rate. Right now, that'll cost you about a point for each quarter of a percent drop in the rate.
Do the math on a 30-year fixed mortgage loan from Chase Manhattan for $400,000. With zero points up front, the loan would carry a rate of 8.675% and a monthly payment of $3,111. The same 30-year fixed loan with 2 points prepaid yields a rate of 8.125% and a payment of $2,970 a month, resulting in a savings of $141 a month. That savings costs you $8,000 up front. So if you move or refinance before 57 months, you lose money.
Whatever you do, don't postpone that purchase in the hopes that mortgage rates will take a U-turn anytime soon. In some parts of the country, property values are rising faster than mortgage rates. Next time you check, that dream home may cost you $20,000 more.