Mortgage Shopping

[Farmer123]

My wife and I will be building a house next spring and we are beginning to look at mortgages and how to have ours setup.

Here are a few facts:
- plan to live in this house forever
- will have enough cash for about 40% down
- both have credit scores of about 770

I have a couple questions that I am hoping to get clarity on:
- when should we start talking to banks/credit unions?
- is it possible to not have to escrow for property taxes or do banks make that mandatory?
- would we be better of paying as many points as we can up front to potentially lower the interest rate for the 30 year period?
- is it possible to find a credit union/bank that allows bi-weekly payments, ability to pay down principal, and not have to escrow or is this not even possible to find all three together? I would rather pay taxes as a one-time payment
- any other tips on construction loans/mortgages?

Thanks!

[Gin1984]

I did not have to escrow but I looked for a credit union who accepted that.  I'm not sure what you mean by ability to pay down principal but my loan did not have any prepayment penalties. 
You can look around without them running your credit to get an idea as early as you like, it just will be an approximate.
I'd advise to avoid quicken loans because they attempted to scam me and the only way we were ok was my personal relationship with my credit union which expedited our loan.

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[sol]

Most places can give you a rate quote after a 10 minute phone call, then another two weeks to generate the loan.

At least some (and maybe all?) banks do not require that you escrow your property taxes. 

Point buydowns usually make more sense if you are going to go a long time before terminating the loan (by selling or refinancing).  If you are going to live there until your death, and you don't think rates will drop anytime soon, then it probably makes sense to buy down the rate.

Every lender I've ever worked with has had some sort of option for biweekly payments, though some of them cheat and just add the first payment to your escrow account instead of actually applying it against your loan immediately.  It makes a difference, in the amount of interest you pay.

I've never seen a loan that had a prepayment penalty.  I think those might only exist in unusual circumstances.

Last advice:  mortgage brokers are thieves and every online mortgage company that advertises (quicken, lending tree, etc) will absolutely rip you off as much as possible.  I was disgusted by the business practices of these people.  Do not trust anything they say until you get a written contract, because they are trained liars.

- when should we start talking to banks/credit unions?
- is it possible to not have to escrow for property taxes or do banks make that mandatory?
- would we be better of paying as many points as we can up front to potentially lower the interest rate for the 30 year period?
- is it possible to find a credit union/bank that allows bi-weekly payments, ability to pay down principal, and not have to escrow or is this not even possible to find all three together? I would rather pay taxes as a one-time payment
- any other tips on construction loans/mortgages?

[Farmer123]

Thank you for the replies sol and Gin1984!

This answers all of my questions. One other question.. would you recommend using local credit unions/banks to shop around and avoid doing anything online?

[CptCool]

Why are you so insistent on the escrow portion? You pay the same amount for taxes & insurance either way. You also generally get a lower rate if you escrow since then the banks don't have the risk of you not paying insurance/taxes on the property. Less risk for the bank = less money they have to charge to make a profit.

I wouldn't spend too much money on points. Plans change, and you never know what is going to happen with rates. If rates go lower again (it IS possible) then you could get a lower rate for "free" rather than paying points now. Also, put the costs in a spreadsheet and you can generally figure out what the optimal strategy is for paying points, as banks will give you diminishing returns on your money paid for points

[Farmer123]

I guess I would like the flexibility and not have to pay each month.. it is not a big deal, but I wasn't sure how banks handled this. If the rate would be increased to have this, then I would gladly escrow.

Thanks for the info on points. Sounds like the payback is usually around 5-6 years. I just figured with the rates so low and planing on staying in this home forever, it made sense to spend some money on points.

[MarioMario]

I would contact your credit union. 

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[WSUCoug1994]

I might have just been lucky in the past but I have had good luck working with independent mortgage brokers that have access to multiple lines of funding.  They can typically get multiple offers from banks and credit unions and it saves you from having to apply to 4-6 different places.  I have never bought points before my current home (hope it is my forever home) and I broke even on the points in six years and saved .45 on my rate.  I have had great experiences with local credit unions - the loan I have now is with Wells Fargo which isn't bad and they offered a rate discount if I direct deposited my mortgage payment.

[sol]

I made a spreadsheet the last time I was mortgage shopping, and the break even point on buying points was five or six years then, too, regardless of how many you bought.  Keep in mind that it still makes sense to buy down more if you are going to carry the same loan longer, due to the additional payoff after the break even point.

But shop thoroughly.  Some of the quotes I got were far enough below other ones to more than offset the points difference.  I got a rate variance of about 1.25% between my lowest and highest rate quote, after accounting for their bullshit fees.  Sometimes lenders are looking to round out a portfolio with a specific LTV or credit score in order to hit their ratings metric, and will this offer you a sweeter deal to have your business immediately.

Lenders will always be a step ahead of you in this game.  They have already done the math in more ways than you know even exist, but you still have some information they don't have.  Like your own future plans of staying there forever, and what other offers you have received.

I had three different lenders tell me over the phone that the best quote I had received was fake and that nobody could possibly offer me that rate and fee structure.  They had all kinds of BS reasons why I should pay more.  I told them they could beat the quote or I'd shop elsewhere.  They all backed out eventually, and I got the good deal I had been promised that nobody else thought was real.  You just have to keep calling them back every time you get a better quote, to give them a chance for your business.  It was a hard few days work, but saved me tens of thousands of dollars.

I worked with about seven different lenders.  Some dropped out in the first 24 hours, three held on to the end vying for my business.  It was a (very) local independent broker who came through in the end, but they sold my loan off almost immediately to one of the big national banks.

[ysette9]

Here are a few facts:
- plan to live in this house forever
- will have enough cash for about 40% down
- both have credit scores of about 770

I have a couple questions that I am hoping to get clarity on:
- when should we start talking to banks/credit unions?
- is it possible to not have to escrow for property taxes or do banks make that mandatory?
- would we be better of paying as many points as we can up front to potentially lower the interest rate for the 30 year period?
- is it possible to find a credit union/bank that allows bi-weekly payments, ability to pay down principal, and not have to escrow or is this not even possible to find all three together? I would rather pay taxes as a one-time payment
- any other tips on construction loans/mortgages?

Some questions and thoughts for you. First, you say you will have enough for 40% down, but does that mean you plan on putting 40% down? You can run the numbers for yourself with cFIREsim.com or whatever your favorite calculator is, but if you are planning on staying here for the long term then it doesn't make any sense to put more than 20% down. Investing the extra in the stock market over the 30-year life of the mortgage will give you more money in the end unless the stock market performs substantially differently than it has in the past 120 years.

Are there external factors driving your timeline to buy/build next spring instead of this year? With all other things being equal, it makes more financial sense to buy now with 20% down than wait a year to have 40% down and (likely) higher interest rates.

As for shopping around, we are current in the process of getting pre-approved at three different places: two large banks and one local credit union. I'd plan on applying for a pre-approval at least a week in advance of when you want to make offers. If you are really looking at a year out then there probably isn't anything you need to be doing for the next 11 months. :) Maybe you could do some research on which institutions are going to be good for a construction loan since that is particular flavor that is out of the ordinary. For us, for example, we are going with places that know and work regularly in our unusual market and will be able to close on a jumbo without a ton of headache. Good luck.