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July 7, 2003
Do Your Homework
Upfront Mortgage Lenders (UMLs) are for intelligent shoppers who have
done their homework. Before they start shopping, they should know the kind of
mortgage they want, and the market niche in which they fall.
"Kind of mortgage" includes the
type (whether fixed-rate, adjustable rate or balloon), term, down payment,
required lock period, and the number of points they want to pay or receive from
the lender. There is a wealth of information available, on this and
other web sites, to help you in your selections.
"Market niche" refers to any
deviations from what lenders consider the ideal applicant. The ideal applicant
has excellent credit, is a citizen or permanent resident alien, is purchasing or
refinancing a single-family detached house as a primary residence, will not take
cash out of the transaction if refinancing, will not have a second mortgage at
closing, will fully document income and assets, will escrow taxes and insurance,
is the sole borrower (or, if one of several, all will occupy the property), has
enough cash from own sources to meet down payment requirements and settlement
costs, and has sufficient income to meet standard maximum ratios of housing
expense and total expense to income.
Shop
Once you know the loan you want and the
market niche in which you fall, you can determine very quickly whether or not a
UML meets your needs. You merely check the UML�s table of
Market Niches Priced on Line. If your mortgage and niche are not there, you
can go elsewhere without wasting time.
If your mortgage and niche are priced
on-line, you can easily compare the prices against those of another UML. Even if
your comparison is with a non-UML lender, you know how to specify your
transaction so that any quote you get will be exactly comparable to the one you
already have. Make sure all comparisons are as of the same day, since a change
in the market can invalidate comparisons made on different days.
Select
If you are selecting from among UMLs, you
take the best deal, considering rate, points and other lender charges. If you
are comparing quotes from a UML with those from a non-UML lender who does not
price your deal on-line, a number of other considerations enter the picture.
- During the period between the day you
compare quotes from different lenders and the day you lock the price, the
market can change. Since you can monitor your price on the UML�s web site,
you know the true market price on the day you lock. In contrast, the market
price of the non-UML lender on the day you lock is what that lender says it
is. Some loan providers give low-ball quotes to hook the borrower, then
raise the price on the lock day.
- The UML guarantees its fixed-dollar fees,
including credit and appraisal charges, through to closing. This
assures you that new fees won�t be added, or existing ones increased,
after you have committed yourself. If a lender won�t provide such a
commitment, you are exposed.
Selecting an ARM
A UML may disclose information on potential
ARM performance � what will happen to the interest rate and mortgage payment
under no-change and worst-case scenarios. The first assumes that the most recent
value of the index remains unchanged through the life of the loan, while the
second assumes that the ARM rate increases by the maximum amount allowed in the
contract.
Alternatively, the UML may provide the
information needed for the shopper to calculate these (and perhaps other)
scenarios using calculators on my web site or other sites. The required
information is shown in Information
Needed to Evaluate an ARM.
This makes it relatively easy to compare ARMs
offered by different UMLs. You can use my calculators 7b, 7c, 9a and 9b. If comparison is with a non-UML lender, you know
exactly the information you need from that lender to make a valid comparison.
Copyright Jack Guttentag 2003
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