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The Cost of Money

When Purchasers decide to buy a house, they generally begin the process by shopping for a mortgage. In this market most Sellers want to know that their Buyers can qualify for a loan. Consequently, they require a “pre-approval” from their Buyers before they agree to sell them the house.

A “pre-approval” is not a guarantee of a loan, but indicates that the Purchasers have good credit and, if all the information given proves to be rue, will be able to get financing to buy the house.

Purchasers should be informed as to the costs of a loan. Some banks charge more to originate a loan and some loans will have higher interest rates than others. There are several reasons for the spread in loan costs and rates. The first thing the banks look for is the credit rating and other indebtedness of the Borrower. If the Borrower has a number of late payments or has a poor payment history for his det, he will pose a greater risk to the bank. There’s an old adage that states, “risk equals rate.” When the bank perceives a higher risk, it will charge a higher rate. If a Borrower is offered a rate he believes is too high for him to handle, he may “buy down” the rate by paying additional “points” when taking out the loan. Each point is one percent of the mortgage amount. Payment of several points may reduce the interest rate. Borrowers should beware of banks that offer a loan at a high rate while charging g a number of points. Although the mortgage banking industry is regulated by the government, dishonesty can still occur, particularly when the Borrower is unfamiliar with the process.

Before agreeing to take the loan offered by the bank, the Borrower would be well advised to have his attorney review the terms and conditions of the loan. A real estate attorney should know the prevailing rates and be able to advise is client as to the quality of the loan.

A Borrower with good credit, adequate income, sufficient funds for the down payment and few outstanding debts will qualify for the lowest rates even without paying points to the bank. All loans are not created equal, however, so shop around. Even an eighth of a percentage can make a great difference I the cost of the loan’s repayment over thirty years.

Some Borrowers will not qualify for the least expensive loans because they have income that may not be verifiable or they may have no funds for a down payment. They will pay higher rates and possibly greater origination fees. A Purchaser must take an honest look at his financial situation when anticipating borrowing mortgage money. The stronger he is financially, the better the rate and the lower the origination fees he will pay. He must ask himself not, “is this the best loan available?” but rather, “is this the best loan for which I can qualify?” Once the Purchaser has answered that question to his own satisfaction, he is ready to apply for the mortgage which will finance the purchase of his “American Dream.”

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