What to look for in your first home mortgage?

[JosephC]

Hi all,

I'm 24 years and married old plan on purchasing a specific home for $300k. We plan on putting down 20% on the mortgage. Our combined income is around 120k. Can you folks provide us advice on what to look for on my first big loan? What kind of research should we be doing? Are there reliable sites to use?

All advice is appreciated. Thanks!

 

[stepford]

As far as I'm concerned rate shopping and fee minimization are all that really matter in a mortgage. Your loan will be sold almost immediately on the secondary market anyway, so which loan originator you get it from won't make much difference. Just shop around, make sure to add up all the "garbage" fees and choose the cheapest one consistent with your time horizon.

I'm not going to take a position on fixed vs. adjustable vs. balloon, nor 15 vs. 30 years, nor on how many points you should pay to buy down your rate. These are personal choices that depend on your circumstances. Within a given type/duration of mortgage, though, total costs can vary considerably and it does pay to shop.

 

[Gumby]

Consider how long you realistically expect to be in the house, as that may drive your decision regarding term and points.

 

[Senator]

My advice, look for a home that is in foreclosure, or needs work. There are plenty available. If you want a specific home, bought on the MLS, you will over pay.

Get a real estate license and buy a home with a 3% discount, then give up the license if you do not want it anymore.

Join a real estate investors club, and learn about property investing. You could save as much as $50K on a similar $300K house.

In the long run, there is not much difference in the types of mortgages you take out. Fixed rate, 15 years, seems to work best. A 30-year mortgage will give you the flexibility of lower payments, without the obligation that a 15-year mortgage has.

Look at the APR on a loan, not the interest rate or points.

 

[athena53]

Look beyond the first monthly payment. I've never been a fan of any adjustables, but if you do, consider the worst-case scenario. How high will the payment be at the highest interest rate they can charge? Could you handle it? Try also to take a long-term view even if you think this will be only a "starter house". When interest rates went up and property values went down, plenty of people found themselves with too little equity to move.


Be careful with the "needs work" category unless you know a contractor you can trust. I watch a lot of HGTV in the gym and many fixer-uppers are nightmares when you get into the walls or start tearing out the bathroom fixtures. That's when the leaks, the knob-and-tube wiring and the code violations turn up!

 

[EastWest Gal]

My advice, look for a home that is in foreclosure, or needs work. There are plenty available. If you want a specific home, bought on the MLS, you will over pay.

Get a real estate license and buy a home with a 3% discount, then give up the license if you do not want it anymore.

Join a real estate investors club, and learn about property investing. You could save as much as $50K on a similar $300K house.

In the long run, there is not much difference in the types of mortgages you take out. Fixed rate, 15 years, seems to work best. A 30-year mortgage will give you the flexibility of lower payments, without the obligation that a 15-year mortgage has.

Look at the APR on a loan, not the interest rate or points.

I like 30 year mortgages, then make extra principal payments. It is a practical way to cut your effective APR and you own your home sooner, and build up equity. Then, if tough times hit, you can back off to the normal payment for awhile.

However, 15 year mortgage will give you a APR and lower interest paid overall. Adjustable rate mortgages makes no sense in a low interest rate environment.

Even if you move, the higher equity you have due to the extra principal payments gives you more cash for your next home. When we moved in 1998, we had saved up for the down payment for our house, and when we sold our old home, had $120K extra cash, some of which was used to finish the basement, the rest went into investments. Refinanced to a 15 year mortgage in 2003, pulled out about $40K to put in a pool, but our monthly payment was only $300/mo higher. We continued to make extra principal payments each month and paid off the house 11 years later.

Buying foreclosure a and fixer-uppers aren't for everybody, but can save you some money.


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[Dash man]

Look for the lowest APR on the mortgage. I recommend a 15 year loan to increase your equity more quickly and hopefully get to be debt free at a young age. Check the property taxes and insurance costs before you sign the purchase contract, so you know what the total payment is before hand. Check to see if you'll need flood insurance. Buy the house you need, not the one you want...keeps the costs down. Buying on emotion can get very expensive. What a Realtor or mortgage broker tells you what you can afford may be a lot higher than what your comfort zone is. Know what your budget is and stick to it. Any house will require maintenance, furnishings and unexpected repairs, so consider that in your budget. Try to find out the utility costs for the home so you can consider that in your budget. Older homes that haven't been updated and the size of the home have a big impact on utility costs. Read home owner association documents closely and know the fees and financial condition of the association. Have the home professionally inspected, but they may not find everything. Check the neighborhood at night and on weekends to get a sense of noise levels and activities. Good luck!


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[poorcarver]

Buy the very worst house in the very best neighborhood.

 

[harley]

I personally would take a 30 year fixed rate, and pay it off as slowly as possible. You're probably never going to be able to borrow money this cheaply again. Of course, this strategy depends on your ability to save and invest the difference you would pay on a shorter term mortgage. But if you can do it you should come out ahead of just building equity in the home. If you don't think you can be that disciplined, go for the 15 year mortgage to get the cheaper rates. It's unlikely you'll stay in the house that long anyway.

And as others have said, just get the cheapest version of whatever mortgage you decide on. Don't roll any fees into the mortgage if you can avoid it. It's been awhile since I shopped for a mortgage (they won't lend money to people with no income) so I can't help with the websites.

 

[Big_Hitter]

my advice: make sure that whoever you are dealing with doesn't e-mail you any forms unsecured - you will need to give them certain personal data, including but not limited to your SSN and income


also, go conventional - FHA/VA etc can ruin a deal

 

[38Chevy454]

Buy what works for you now, not what you think you need in future. That usually means keep the house smaller. I am in the fixed rate camp for sure, especially now with such low rates. Whether you go 15, 20, 30 or whatever term, chances are you will sell before paying it off. So the argument is using other people's money (OPM) vs building up equity. Assuming the 30 year vs 15 year, as long as you save the extra amount available with the lower 30 year payment, it will benefit you in the long run. With the low rates now it can be argued to try and maximize savings vs building equity in the house. In other words, leveraging OPM. If your local market is going up, even more reason to maximize leverage of OPM. Of course nobody can predict the future of the local real estate market with certainty.

As for loans, look at fees and APR. Not interest rates alone. I would not go with adjustable or balloon. Just a std fixed rate conventional mortgage.

 

[omni550]

I had a positive experience earlier this year while getting a mortgage for a condo in Florida.

I used Third Federal Savings & Loan (they are huge nationally in the mortgage business) and got a 2.89% loan for 10 years. https://thirdfederal.mortgagewebcenter.com/

omni

 

[MBAustin]

I suspect with $120K income you would qualify for a much larger mortgage so you are already taking one very smart step - buy the house you need, not the house you want or the house you can afford (from experience, the real estate agents will try and talk you into "just a little more" above your budget). The 20% down helps protect you from a real estate downturn so that's also a really good move.

We always bought a house that we could afford on just one of our incomes, in case one of us decided to stay home with the kids, go back to school, etc. If you can do that, you give yourself lots more options.

Our real estate agent referred us to an excellent mortgage company on our last purchase, unfortunately they have closed down since then so I can't help with specifics there.

 

[rodi]

As MBAustin said - you are smart to be keeping your loan to income ratio lower than what you'd probably qualify for.

From a mortgage shopping POV consider all of the fees. Each originator has a different bundle of fees. Escrow fees, doc fees, origination fees, points, appraisal fees, etc... They vary in the amount and which fees are applicable based on which lender you choose. That's where the APR comes in, vs the advertised rate.

Statistically, people move every 7-8 years - so if you decided to take points, calculate your payback time on those points. If it's a short payback (a few years), then it's a good deal...otherwise skip the points and get a rate where the APR is close to the advertised rate.

Shop around for your lender. Select a mix of banks, mortgage brokers, online mortgage services. Compare the rates and fees closely. Again, this is challenging on the "fees" portion because some lenders don't want to issue a truth in lending form till you commit to them. Don't exclude banks from your shopping around - some have great rates. And don't exclude online lenders like Aimloan or Quicken loans.

 

[soupcxan]

Get an ARM. No one stays in their first home for 30 years. When you get a 30 year mortgage you are paying for the privilege of locking in rates for 30 years. You're wasting money by going fixed.


On $240k borrowed, a 5/1 ARM @ 2.97% will save you $2k in interest expense per year over a 30 year at 3.83%. That's $2k that can go into paying down the principal faster.

 

[harley]

Get an ARM. No one stays in their first home for 30 years, the average is 11 years. When you get a 30 year mortgage you are paying for the privilege of locking in rates for 30 years. You're wasting money by going fixed.


On $240k borrowed, a 5/1 ARM @ 2.97% will save you $2k in interest expense per year over a 30 year at 3.83%. That's $2k that can go into paying down the principal faster.

Yeah, and I'm sure that rate's going to stay right there over that whole time. I might consider the ARM if I was going to move within 5 years, but then again I wouldn't be buying a house if I was moving that soon. IMO, this is horrible advice.

 

[Animorph]

Check rates and costs at bankrate.com . I used AIMLoan.com for my last two refi's. They were the lowest I could find the last couple of years, though I heard they required great credit ratings. You can get their current rate and precise costs without giving them more than location and loan amounts, all live online. A nice reference at least.

I always get a 30 year loan at low rates and invest in my portfolio rather than pay off the loan early. That works nicely if you think you'll make better than 4% on your investments.

If you'll be in the house longer than 8-10 years it is probably worth it to pay points and buy down your interest rate. Higher initial costs, but lower monthly payments. If this is more short term, get the zero points loan, lower initial costs but higher monthly payments.

 

[soupcxan]

Yeah, and I'm sure that rate's going to stay right there over that whole time. I might consider the ARM if I was going to move within 5 years, but then again I wouldn't be buying a house if I was moving that soon. IMO, this is horrible advice.

Over the last 30 years, the ARM would have come out ahead way more often that not per this graph. Opinions are fine, but facts are better.

Of course, "interest rates will shoot up any day now!" as they've been saying for the last +5 years.

 

[harley]

Over the last 30 years, the ARM would have come out ahead way more often that not per this graph. Opinions are fine, but facts are better.

Of course, "interest rates will shoot up any day now!" as they've been saying for the last +5 years.

You can't have "facts" about the future. I wouldn't take that bet, which is why I said IMO. I wouldn't advise the OP to either.

 

[Texas Proud]

I personally would take a 30 year fixed rate, and pay it off as slowly as possible. You're probably never going to be able to borrow money this cheaply again. Of course, this strategy depends on your ability to save and invest the difference you would pay on a shorter term mortgage. But if you can do it you should come out ahead of just building equity in the home. If you don't think you can be that disciplined, go for the 15 year mortgage to get the cheaper rates. It's unlikely you'll stay in the house that long anyway.

And as others have said, just get the cheapest version of whatever mortgage you decide on. Don't roll any fees into the mortgage if you can avoid it. It's been awhile since I shopped for a mortgage (they won't lend money to people with no income) so I can't help with the websites.

+1

Also, since you are putting down 20% make sure they do NOT charge you PMI...

If you are good at money management, pay the fee so you do not have an escrow account... when I had one they screwed it up almost every year.... I had lots of excess money sitting in escrow doing nothing for me year after year... not as important with this low rate, but back then it was real lost money....

 

[ExFlyBoy5]

+1

Also, since you are putting down 20% make sure they do NOT charge you PMI...

If you are good at money management, pay the fee so you do not have an escrow account... when I had one they screwed it up almost every year.... I had lots of excess money sitting in escrow doing nothing for me year after year... not as important with this low rate, but back then it was real lost money....

You have to be careful with the escrow account. When we were living in Texas, we had a mortgage and didn't want an escrow account (for obvious reasons). A large percentage of lenders will CHARGE you a fee (as a percentage) at closing to NOT have an escrow account. However, this CAN and SHOULD be negotiated. There are lots of lenders out there, and if you are highly qualified and are putting down AT LEAST 20%, many of those fees can be waived and/or reduced.

Also, if you qualify, take a look at Navy Federal or Pen Fed...they are both very good to work with and the fees are hard to beat.

+1 on fixed rate. They are so low right now, there aren't many good reasons to get an ARM.

And lastly..+1 on doing conventional. In a seller's market (as most areas are now) it's all about competition between buyers. For the *most* part, a savvy seller will pick a buyer who is conventional over a FHA/VA loan. Dealing with the government is a pain and that includes the folks at the FHA and VA.

 

[soupcxan]

+1 on fixed rate. They are so low right now, there aren't many good reasons to get an ARM.

Our ARM saved us ~$9000 in interest expense in the last two years, that's a pretty good reason to me.

 

[Texas Proud]

You have to be careful with the escrow account. When we were living in Texas, we had a mortgage and didn't want an escrow account (for obvious reasons). A large percentage of lenders will CHARGE you a fee (as a percentage) at closing to NOT have an escrow account. However, this CAN and SHOULD be negotiated. There are lots of lenders out there, and if you are highly qualified and are putting down AT LEAST 20%, many of those fees can be waived and/or reduced.

Also, if you qualify, take a look at Navy Federal or Pen Fed...they are both very good to work with and the fees are hard to beat.

+1 on fixed rate. They are so low right now, there aren't many good reasons to get an ARM.

And lastly..+1 on doing conventional. In a seller's market (as most areas are now) it's all about competition between buyers. For the *most* part, a savvy seller will pick a buyer who is conventional over a FHA/VA loan. Dealing with the government is a pain and that includes the folks at the FHA and VA.

The fee for me was either $100 or $150, cannot remember... if it were a % I would have brought it up as an issue....


I see that the ARM and fixed is being batted around.... that is a personal decision.... but, I just looked at rates from Box home loans for a $240K loan and the rate with the closest to zero fees was 3.9 for 30 year, 3.1 for 15 years and 3.4 for 5/1 ARM.... kinda makes it easy to pick the 15 year fixed since it is the lowest rate.... but, the 30 year is only $60 more per month than the ARM.... sure, it adds up over the years, but you are fixed and do not have to worry if and when rates go up....


Now, if you need the cash flow and cannot do the 15 years and plan to see in 5 to 10 years... the ARM could work.. but in my example you save less than $4K in 5 years.... Soupcxan must have a pretty big mortgage to save that much money.... BTW, when I did my refi the 15 year was also lower than the ARM... so I am saving money by being fixed with zero worry on a rate increase.....

 

[harley]

The fee for me was either $100 or $150, cannot remember... if it were a % I would have brought it up as an issue....

I agree, avoid escrow if possible. I don't know if it's something decided state by state or what, but I've never had to pay a fee to not do escrow. These homes were in VA and MD. I'd negotiate the fee. Why pay them money NOT to have to do the work.

I see that the ARM and fixed is being batted around.... that is a personal decision.... but, I just looked at rates from Box home loans for a $240K loan and the rate with the closest to zero fees was 3.9 for 30 year, 3.1 for 15 years and 3.4 for 5/1 ARM.... kinda makes it easy to pick the 15 year fixed since it is the lowest rate.... but, the 30 year is only $60 more per month than the ARM.... sure, it adds up over the years, but you are fixed and do not have to worry if and when rates go up....

Now, if you need the cash flow and cannot do the 15 years and plan to see in 5 to 10 years... the ARM could work.. but in my example you save less than $4K in 5 years.... Soupcxan must have a pretty big mortgage to save that much money.... BTW, when I did my refi the 15 year was also lower than the ARM... so I am saving money by being fixed with zero worry on a rate increase.....

Once again, +1. With rates as low as they are there just isn't that much difference between the options. $9K in 2 years would have to be a honker of a mortgage, and might be worth it, maybe, I guess. Again, I wouldn't want the uncertainty on the rate, especially as the 15 year FRMs are as low or lower.

I once (2007ish) had a zero interest jumbo liar's loan for $750K (those were the days). I kept it for 2 years before refi'ing into a $417K conventional 30 year. I saved close to $2K per month for those 2 years, although I ended up paying a pittance of a penalty when I refi'd. It was stupid that they let me do that, especially without me supplying much in the way of documentation. But no way I'd recommend something like that. For me the 30 (or 15 or 20) year fixed rate is similar to the "sleep better at night" feeling that the no mortgage people are always saying. I prefer having managed my finances in a way that the result is pretty much under my control.

 

[HawkeyeNFO]

Joe C,

How long do you think you'll be in the house? All the arguing about ARM or fixed rate is pointless without the answer to that question. Your plans might change, but what do you think today?