Taking the Mystery out of Financing

As you begin to work with a lender, you'll hear many new terms and will be introduced to new procedures. Some of the major concepts and terms you should know are:

Shopping rates.

When shopping interest rates among lenders, it isn't always easy to compare. Interest rates are expressed as:

Discount Points

Discount points are equal to a percent of the loan amount. 1.25 points is equal to 1.25% of the loan amount. For example: On a $100,000 loan that equals $1,250. If you pay more points it will lower the interest rate. Paying points can be good if you plan on living in the home for more than three years and the points may be tax deductible.

Loan Origination Fees

Origination fees are often expressed as a percentage. A one percent loan origination fee is equal to1% of the loan amount. Countrywide does not charge an origination fee on most conventional loans.

Some lenders may only tell you about the discount points and loan origination fees when you ask about closing costs or specifically the discount points associated with the interest rate quote. Don't let them get away with it! Get an itemization of the costs to close the loan and of the recipients of the fees (also called a Good Faith Estimate).

Annual percentage rate (APR)

The APR combines the interest rate, points and related fees to more accurately reflect what you will be paying. Note: Lenders are required by law to disclose the APR.

Rate lock-in

Once you have chosen a certain loan program with a lender, you should ask them to guarantee, or lock-in, the interest rate that you've discussed. Better yet, make sure that they will let you grab a lower rate in the event that rates should fall during the process. Make sure the lock-in period is long enough to get you to the closing and that the sellers can vacate in 45-60 days.

Prepayment fees

Home loan interest rates are at or near historical lows, and that means you can further maximize your home purchasing power with Countrywide's Reduced Rate Option, while avoiding costly penalties that many other lenders impose. This alternative reduces the interest rate on your loan up to 0.375%, or cuts the discount points by a full 1%, when you agree to a "pre-payment" penalty on your loan should you decide to refinance it. However, you can still pay off the loan early should you sell the home. As today's low interest rate environment makes it unlikely that future refinancing will be a sensible option to further lower your rate, this is a great way to reduce monthly loan payments or qualify for a larger loan amount.

What does a lender need from you?

Here's a quick overview of a typical lender's financing process:

Prequalification
Determining the limits of what you can afford.

Preapproval
An actual credit approval verifying income, liabilities and your ability to repay the loan.

Closing
A third party agent of your choosing coordinates final signoff on paperwork and activates the transfer of funds.

Make sure your lender has the following information prior to your loan application:

Earnings statements or proof of self-employment (W-2 forms, pay stubs and tax returns). The home purchase contract. Debt information such as car notes, credit card numbers, and creditor addresses and phone numbers. Bank statements for most recent three months with account numbers and your local branch address. Evidence of mortgage and/or rental payments.

Closing

After you've applied for your mortgage and it's been processed and approved, you can set a closing date. At the closing, your mortgage is activated, and you are given the keys to your new home. Here are the major steps that need to happen in the weeks before your closing:

Title search and insurance

To protect themselves against the possibility of a fraudulent sale, lenders require a title search. A title search uncovers any liens, lawsuits and legal claims involving the property. Lenders also require that you buy title insurance to further protect you and them just in case there is still a complication with the title after the deal has been made.

Survey

The title insurance company may require a survey of the property. This is to verify the zoning location and official boundaries of the property. You'll probably have to foot the bill for this charge too.

Homeowner's insurance protects the contents of your home from theft and the structure from most disasters.

A word about closing costs

Closing costs are a mystery to most first-time buyers. One reason is that they aren't standard and they vary from state to state - and factors such as your loan balance can make a difference in the overall closing costs. Terminology varies too.

In order to compare, ask the following questions:

1. What is your best estimate of what it will cost me to close this loan?
2. Does your estimate include only your lender fees?
3. What fees are you including in your estimate?

So how do you find out what the closing costs will be?

Call several lenders (Countrywide for one!) for a quote that includes all of the closing costs and an itemization of the fees. Since most lenders will allow you the option of paying points to get a lower interest rate, or not paying any points to get a higher interest rate, make sure each lender gives you the same interest rate quote and tells you the associated discount points(lenders will vary the associated points to offer the same rate). Then you can make an apples-to- apples comparison of the rate offered from one lender to another.

In theory, the APR (Annual Percentage Rate), which is required to be disclosed by the government, is a good tool to compare rates across different lenders. That's because it includes most closing costs expressed in the form of a rate. However, it doesn't allow you to compare the cost of financing among different lenders unless they are offering the same interest rate or unless the quote is a no-points quote.

You should also know that the higher the points paid up front, the lower the interest rate - and thus the APR. That may be a fine way to pick a loan if you're planning to stay in your home forever, but it probably will hurt you if you only end up staying in your home a few years.

The final walk-through.

Most contracts allow for a final walk-through inspection. Here's your last chance to make sure that the seller has properly vacated the premises, left it "broom clean," and left behind the agreed-upon appliances. Make sure that all the contractual agreements have been met at this time.

Don't worry - be happy

Closing need not be a stressful situation. We've outlined the major points that you should be aware of, so you shouldn't have too many surprises. Stay tight with your lender and any other counsel you may have assisting you. Clear and consistent communication is key.



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