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How to negotiate a home loan

STEAMBOAT PILOT & TODAY

Purchasing a house most often means securing a loan and knowing how to negotiate loan terms can end up saving buyers a great deal of time and money.

One of the most important steps in getting the right loan is focusing on all of the terms of the loan, and not just on interest rates and closing costs, said Linda Palmer, owner of Western Colorado Mortgage Services Inc.

“Most mortgage professionals compete for the borrower’s business by discussing interest rates and closing costs,” Palmer said. “There are actually five factors of a loan rather than just these two. Without knowing each of the five factors and how they interrelate, it is virtually impossible to compare different loan programs.”

The factors that borrowers need to consider are: total payment, or the total amount the borrowers will spend over a certain amount of time; principal paid, or the amount of money that is used to pay the mortgage; interest and mortgage insurance paid; remaining balance, or how much is owed at the end of a certain amount of time; and closing and points, or the upfront fees that come along with the loan.

“If you only look at the closing costs and interest rate, you would miss more than half the factors involved in what a loan is actually going to cost you,” Palmer said.

Palmer gave the example of sailing a ship from San Francisco to Hawaii with small initial calculations in navigations. At first, the ship wouldn’t be too far off course. But two months down the line, the ship would be far from its initial destination.

“The same principle applies here,” Palmer said. “Minor differences today can have major consequences down the road in regard to your existing debt.”

Lenders should go through a total cost analysis with their clients and help point out the best ways to save money over the long term.

For instance, to reduce closing costs, borrowers sometimes get a no-points loan. Because a point is a loan fee that equals 1 percent of the loan amount, these loans can save money at closing, but can also have a higher interest rate. So, no-points loans should be considered carefully. Borrowers can also negotiate costs that come along with preparing and processing documents, reviewing an appraisal, delivering documents with a courier, and settling the deal.

All of these costs can be determined with the help of a lender, and before deciding on a loan, buyers should compare programs and rates offered by several different lenders. Any lenders who promise one rate and then give another should be avoided.

It is also helpful for buyers to be organized and have certain documents on hand before going to a lender. Buyers should first order and analyze their credit reports to make sure they will qualify for loans. They should get copies of tax returns and other financial documents their lender will need to determine how much they can borrow.

And they may want to consider getting pre-approved for a loan, a step that helps buyers know how much they can borrow and gives them an advantage when making an offer for a home.

After doing some homework and comparing different loan programs, a buyer should be prepared to choose the best loan program and to take one more step toward owning a home.