Even though modern mortgages only came into fruition in the early 1900s, the first ever mortgage issued by a lender can be traced to as far back as the 1200s.
If that information is correct, then mortgages have been a part of the general economy for multiple centuries.
This means that for a product that has survived the test of time, surely there must have been some invaluable wisdom about it that has been passed down over the years for the benefit of the modern world.
Here are 10 timeless tips about managing mortgages that is as valuable now as they were many generations ago.
1) Understand your financial situation
Even before you apply for a mortgage, it is essential that you understand your financial situation intimately.
Too many borrower jump into a loan without realizing the consequences it could have on their lifestyle.
This might not make a big impact when we are talking about personal loans of a few hundred to a few thousand dollars. But a home loan can go up to hundreds of thousands of dollars and even millions.
And it won’t just have an impact on your finances. But also the well-being of your family as well.
While cash flow can make or break your ability to service a loan, the clarity of your financial and life goals are critically important too.
Some important questions that you need to have to answer to include:
- How long do you intend to keep the loan?
- What’s your tolerance level for risks?
- Will you be relocating anytime soon?
- Will you be upgrading to a bigger and better house as soon as you can afford it?
Having the answers to these key questions will make choosing a suitable mortgage that much easier.
2) Get it right the first time
It might be true that when one gets rejected by a lender, he can still try again. But that’s not the whole truth.
Office politics and bureaucracy is as real as it get in the corporate structure. And it can really hamper your chances of obtaining a desirable approval.
I know this sounds weird. But here’s how it makes perfect sense.
Let’s say a borrower gets his application declined because of a bad credit score. Should he miraculously be able to fix it and apply again soon after, questions will be raised internally on how it has happened so fast.
Even if the adverse credit was caused by a error in credit reporting, the fact that the first application was recorded in black and white give the credit analyst an unwanted problem.
If the officer is to approve it now, it would be like saying to his superiors that he was incompetent during the first application for missing out such material information. This is a very bad turn of events when his performance appraisal arrives at the end of the financial year.
The likelihood is that the application will still be declined and the applicant asked to try again in 3 to 6 months.
If you have already committed to purchase a property and closing day is approaching, that is 3 to 6 month too late.
And if the officer truly wants to help approve the application to correct the wrong, the borrower can expect to be asked to submit a ton of paperwork to elaborate why his credit report turned out that way in the first loan application.
This is so that he can show his superiors that it was a mistake that even the most experienced analysts would have missed out on during underwriting.
And even so, the application might still be rejected by the approver.
The rejected of the first application, being recorded by the lender can easily nudge an approver to be cautious instead of bold.
It’s in their nature. They are trained that way.
Should the first application be declined due to a high debt ratio that renders a borrower incapable of servicing the mortgage according to the internal policies of the lender, then the action that the borrower took to remove debt liabilities just so to apply for the loan a second time raises serious questions regarding the agenda of the borrower.
For some reason banks loathe borrowers who play with the system.
If an action is taken by an individual with the purpose of getting a credit facility approved, it a sign that he is knowingly trying to game the system.
To justify his keen eye for details and reaffirming his decision to decline an applicant in the first place, a credit analyst would again, be more like to decline the applicant again or request the borrower to come back in 3 to 6 months.
And again, if the borrower is to squeeze through the credit assessment process on a second application, he can expect to be asked to provide more documentation to elaborate why and how the situation has changed this second time around.
As discussed above, it is best to get your house in order before applying for a mortgage so that you get it right the first time.
This is when you have the most amount of goodwill.
3) Apply with not more than 3 lenders
Unless your credit is in dire state leaving you in desperate need for a mortgage within a very short time, you should not try for a loan from more than 3 lenders.
Mortgage brokers and online loan comparison sites tend to advocate that a borrower apply with as many lenders as they can so that the borrower can have many to choose from.
But if you know that you have a satisfactory credit and buying a house comfortably within your means, you should have no problem getting your requested loan quantum approved.
The dilemma is with identifying which lender offers the best interest rates and terms.
Comparing home loans is really easy and not as complicated as the many mortgage comparison sites would want you to believe. They make the process sound difficult and complex on purpose so that you would use their services.
You don’t need to be a genius to realize that 5% is cheaper than 7%.
The 4 main decisive criteria that helps borrowers decide on the type of loan are:
- Fixed rates (FRM) for stability and predictability over the long term
- Adjustable rates (ARM) to take advantage of teaser rates over the short term
- Flexibility of the loan in terms of conversions and prepayments or redemptions
- Points and other closing fees
To a certain extent, freebies like legal subsidies and fee waivers can play a role. But they are not that significant.
So just identify the lenders offering the best interest rates for adjustable rate mortgages, fixed rate mortgages, and flexible terms.
If you have yet to decide which one to sign up for, apply for all 3 so that you can obtain the concrete offers on the table.
After which you can decide and select from them.
There’s a reason why you don’t want to submit applications with every lender you see.
With every application, the lender makes a request for the person’s credit report from the credit bureau. These hard inquiries can be observed by lenders who are evaluating the borrower and can negatively affect the borrower’s credit score.
While it is claimed that this does not affect ones credit, having ridiculously many pings on these requests just makes the borrower look desperate and even a joke.
It doesn’t paint a good picture of the borrower for the current application and for other credit applications in the near future.
It only alerts a bank that they should pay special attention to the individual by being extra meticulous in credit analysis.
4) Get familiar with common mortgage jargon
There is still an unhealthily high number of borrowers who nod along pretending that they understand everything a mortgage banker is explaining.
I get it.
Most people will feel that a housing loan is something they only personally come across a few times at most in a lifetime. And a banker will explain everything at closing.
So why put on that studious hat and get acquainted with all that professional jargon?
The answer is very simple and profound. Because a lot of money is at stake!
Knowledge in this area will help you identify the best loans and keep predatory lenders at bay.
For example, the annual percentage rate (APR) shows the cost of credit and does not show the true nature of how interest rates work in a traditional mortgage.
5) Be particular when comparing loans
Mortgages these days can come with so many interest rate variations and so many features that it is no longer possible to compare them without a little deep thinking.
This is without mentioning the host of mortgage jargon they might use and the self-created jargon that copywriters coin just to sound clever.
When comparing between two or more loans, it is best to draw up a proper table and list the attributes of each loan side-by-side for a clearer picture of what is going on.
|Loan 1 (ARM)
||Loan 2 (FRM)
||Loan 3 (Hybrid)
|Thereafter||LIBOR + 5%||8%||LIBOR + 6%|
|Free fire insurance||Yes||Yes||No|
The table above is by no means complete. It’s just an illustration of how one should compare different loans.
Putting all figures and statistics into a table makes comparison more systematic and helps keep emotional bias at bay.
The amortization table in particular, should be something to take a long look at.
Because underneath all the market keywords, attractive interest rate, and fanfare, this is the document that shows the actual numbers.
If everything a loan officer tries to tell you makes little sense, this table contains data that a regular home buyer should be able to understand.
It would be of great benefit to learn how amortization works.
6) View the application form as your business proposal
Just like how an entrepreneur approaches an investor for capital, you should look at applying for a mortgage the same way.
You need a loan (seed funding) for your property purchase (startup) to move forward.
Just like how a businessman might never hear from private equity firm again if the business proposal is lousy, you might never hear from a lender again if your application form does not tick the right boxes.
Provide factual information without trying to be too clever.
Make declarations as required and never hide stuff that you feel could be detrimental to your loan application.
Anyway, you won’t know what information are material to a lender. So don’t guess what is and what is not.
By the way, if a mortgage is approved and a lender finds out later that there have been lies provided by the borrower in the application form, the lender has the right to tear up the contract.
If the funds has already been disbursed, it can still be recalled.
7) Keep abreast of market rates after approval
The easiest way to save on mortgage rates is with a stroke of luck. Yet without paying attention to what is happening in the market, you will not get that luxury.
The truth is that the market for any type of credit facilities including loans is as competitive as it gets.
It’s no exaggeration to say that it is the most competitive market in any capitalistic economy. This is quite rational thinking when you consider that all lenders essentially sell the same fungible item that is money.
A dollar from a lender equals to a dollar from another.
If we leave out all the gimmick of features, the only thing that they compete with each other on is the cost of money… that is interest rates.
This is why lenders constantly create promotions and offer packages not only to offer very attractive loans, but also as a response to what their competitors are doing.
So it is not far fetched to suggest the high possibility that a better loan with better interest rates become available and offered by a lender after they have approved your mortgage.
The reality is that there is often a significant time lag between the application of a loan until the moment it is accepted by a borrower.
During this time, if a better deal becomes available, the borrower has every right to request for that instead of the previous one which is a worse deal than the new one.
The only thing stopping you from doing that is whether you are in the know.
8) Keep updated with mortgage promotions for refinancing opportunities
As mentioned previously, lenders essentially sell the same product. So you really shouldn’t be paying more than you have to on a mortgage.
If an attractive new loan does come up, do not jump straight in.
- Prepayment penalties
- Legal fees
- Administrative charges
Only make the move after carefully calculating the amount of savings your would make, or if you would save at all.
Break even points are particularly useful when contemplating refinance.
It’s not uncommon to find better interest rates on another loan, yet moving to it is not worth the effort as the savings are insignificant or that there are no savings at all after accounting for all the charges and eventual interest costs that comes with it.
9) Early repayment is not necessarily a good thing
A lot of homeowner would state that the first thing they would do should they obtain a windfall is to fully or partially pay off the home loan.
That sounds like a smart and prudent thing to do on the surface. But it might not be the best financial move.
This is because the extra money could be better used in other areas.
For example, if redeeming part of a loan could save a borrower 5% interest on the repaid amount, a stable investment that would yield the borrower 8% would undoubtedly be a better choice.
On top of that, consider that a home loan is a secured loan with probably the lowest interest rates among all credit facilities.
If you are to put $20,000 into a lump sum repayment, and require that $20,000 some time in the future, you are not going to find a personal loan with that type of interest rates. This is assuming that you can get an unsecured loan approved at all.
So think hard before redeeming the mortgage.
10) Everything is negotiable
If you are a first time home buyer dealing with a mortgage for the first time, I can understand how you might think that a banker’s word needs to be taken at face value when he says that their terms are non-negotiable.
That’s the story they are trained to sell. And adjusting terms will just slow down their closing, which in turn affects or delays their commissions on the case.
You see, when features or changes are requested by the borrower, it takes time and extra work on the part of the loan officer to discuss and seek approval from higher management.
And because of the hassle involved and the prospect of them chasing for sales targets to attain higher commission tiers, bankers would prefer that borrowers just accept the terms that come along with the default contract.
This is without mentioning office politics making these internal communications complicated.
This why most bankers and even mortgage brokers insist that the terms of a loan are “standard” and not negotiable.
But a real estate investor who has gone through as little as maybe 5 mortgage applications will be laughing at mortgages being non-negotiable if you ask them about it.
This is because everything is negotiable.
And by everything, I refer to the interest rates, lock-in periods, fee waivers, and basically every term, can be negotiated.
It mostly depends on how you make the request, and the mood of the banker.