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Ahh, mortgages.  Few things get a twenty-something more excited than talk of adjustable interest rates, private mortgage insurance, and good faith estimates.

Okay, this stuff is pretty boring, and like you I really couldn’t be bothered with learning the ropes, which could have been a dangerous thing for my finances.  But really, with some common sense and a little internet research you can do just fine.

I probably should have said this a while back, maybe in Part 1.  Before you get too far into this process, you need to get a preapproval for a mortgage.  Basically what this entails on your end is filling out a brief form with your personal and financial info.  The mortgage agency runs a credit check on you, and then comes back and tells you that you are preapproved for a loan up to a certain amount.  This is a good way to know that the maximum price you came up with before was on target.  If it was way off, maybe you should reevaluate things.

Anyway, to get preapproved you have to first find a mortgage company.  They say you should shop around for rates, but most places don’t make this very easy to do.  What I did was go to my bank where I have my checking account and let them handle the preapproval.  I never committed to taking the loan there, but at least I had my preapproval.  If later I found a different mortgage agency (I did), then I shouldn’t have any trouble getting approved there as well.

As far as finding a good agency, as usual you should ask friends and family for advice.  If someone had a particularly good experience, ask for the mortgage agent’s name and contact them.  I don’t really have much more advice to offer here.  I was unhappy with how my bank was handling things and my realtor suggested National City.  I decided to try them and they were great to work with, so I lucked out.

OK, so now you’re preapproved, you’ve found a place, you’ve signed an agreement of sale, and you’ve probably put some cash in escrow with the realtor.  The next step in this process is to get a good faith estimate.  This is a document which details all of your costs at closing and also estimates your monthly payment.  At this point you have a few decisions to make.  First, how much money can you afford to put down at closing?  Most lenders require you to put down 20% of the home’s price at closing to avoid what is called private mortgage insurance, or PMI.  PMI is an additional fee that you will have to pay each month until you have paid 20% down.  In all the cases I’ve seen, the actual amount per month was fairly small, but it adds up quickly.  The best approach I found is to ask your mortgage agent for several estimates with different down payments… say 5%, 10%, and 20%.  This gives you options and lets you see how much your down payment affects your monthly payment.

I had originally planned on putting 10% down, but I found out that I could save $200 per month on my payment by putting 20% down.  Of course now I don’t have as much cash to furnish the place, but in the long run I will save a lot of money so it will be worth it.  Remember that you have to pay all your closing costs as well, so this takes away from the money you can put down on the home.  My closing costs were roughly $6000 but they can vary a lot, so just be aware.

As far as rates go, everyone I talked to told me to take the traditional 30 year fixed rate mortgage.  Definitely avoid the adjustable rates. 

If you are a first time homebuyer like I was, be sure to ask about special programs.  Both the state and federal government have different plans available and you are probably eligible for something.  My mortgage is being serviced by the Pennsylvania Housing Finance Agency which got me a lower interest rate.  You can also get down payment or closing cost assistance.

Examine your GFE closely using the guide I posted previously.  Take the time to understand each line and be sure to ask your agent if you have any questions about the numbers.

Once you and your mortgage agent agree on a down payment, you can finalize your application and actually get final approval for your loan.  When you have this, you’re just about ready to close! 

You need to get insurance and get a few more things in order before you become a homeowner, so stay tuned for part 4.