It’s one of the nitty-gritty details you’ll stumble upon when buying a home: the escrow account. And you probably won’t encounter one again anytime soon, at least until you buy your next house.

An escrow account is money held by a third party until all legally required conditions have been met. That trusted third party might be a real estate title company, an attorney’s office or an escrow agent. Once conditions are met, the money is distributed to the recipient(s).

TYPES OF ESCROWS

In buying a home, there can be several escrows in play.

• The earnest money escrow. This is the deposit you were required to pay to the seller upon the signing of the purchase agreement.
• The seller’s deed to the property may be held in escrow until the sale is completed. Then it’s transferred to your name and recorded at the county courthouse.
• The lender may hold the loan proceeds in escrow until the closing is finalized. At that point, the money is distributed to the seller, and perhaps to a prior lienholder — for example, to pay off the loan balance to the seller’s mortgage lender.
• The monthly payment escrow, which is established at closing. More on that below.

CLOSING ONE ESCROW — AND OPENING ANOTHER

At closing, you’ll sign the loan and property transfer docs, and your signature will be witnessed by a notary public. That notarization verifies your signature as authentic and valid. Once all of the paperwork has been wrapped up, the funds held in the purchase escrow are distributed to the various parties involved in the sale.

Often another escrow account is then created. Called the monthly payment escrow, it holds the prorated property taxes and other fees that you and the seller have paid. In addition, this escrow often skims a portion from each of your monthly house payments to pay expenses such as annual property taxes and homeowners insurance premiums.

Each year, you’ll receive an escrow statement from your mortgage servicing company reporting the money it collected and the payments drawn from the account. At that time, your monthly note may be adjusted up or down to reflect higher or lower property taxes, insurance premiums or other expenses that are drawn from the escrow account.

WHAT DOES ESCROW COST?

There is no fixed fee for escrow services, and escrow charges are not regulated. They often vary according to the value of the home sale. An escrow agent may begin with a fixed fee but then charge for additional services such as wire transfers, copies and office expenses. Escrow charges can also be rolled into the title insurance provider’s fee.

As a part of the closing costs, escrow services are detailed, along with all other fees, as provided in the HUD-1 statement. And you may have negotiated that a portion, if not all, of the escrow fee is to be paid by the seller, along with other closing costs. In some states, it’s typical for the buyer and the seller to split escrow fees.

HOME AT LAST

You know that “boy, I’m glad that’s over with!” feeling? Prepare for a rush of relief like no other! Once you’ve closed the sale and have those precious keys in your hands, all that stands between you and uncontrolled jubilation is that little matter of moving.

But the joy and feeling of accomplishment will stay with you long after the last box is unpacked. Congratulations on your new home!

Closing, sometimes known as settlement, is when you sign the documents to buy your new home. Remember the amount of paperwork you had to sign to buy a new car? Multiply that by a factor just under infinity and that gives you an idea of how much paperwork you’ll face.

Some settlement agents have adopted paperless closings, but the industry has been slow to change. More than likely, a printer will be spitting out a pile of warm paper on your behalf.

THE 30-YEAR DECISION

It’s likely that you don’t plan to stay in your home for 30 years, but the fact is, if you take out a traditional loan, you’re committing to a 30-year debt. Take a moment to consider the interest you’ll pay just in the first five years. That’s when it will hit you: This really is a big deal, so much so that you might not want to go it alone. If you don’t have an attorney with you at closing, technically there will be no one there looking after your legal interests. The closing attorney represents the seller or the lender, but not you.

THE HOME STRETCH

From start to finish, here’s a closing period checklist. (All told, the time from signed contract to loan closing typically spans 30-60 days.)

• Take the signed sales contract to your lender and begin the finalization of your loan. And consider whether you want to lock in your interest rate.
• Order a home inspection (and perhaps a radon and termite inspection). Try to schedule time to tag along at the inspection.
• Confirm that your lender has ordered an appraisal.
• Follow up on matters uncovered by the home inspection.
• Track contingency deadlines.
• Contact your insurance agent to establish a homeowners policy (to go into effect the day of closing).
• Schedule utility transfers and complete a change of address. Attend to other moving details.
• Has the closing date been set yet? Make sure you know where the closing will be held — and how to get there!
• Review the HUD-1 settlement statement before the closing and compare it to the Good Faith Estimate. If there’s a discrepancy, talk to your lender right away.
• Know how much you’ll owe at closing — and how you’ll be paying (cashier’s check, certified check, wire transfer, etc.).
• Close out contingencies.
• Confirm with the lender that the loan process is on track for the scheduled closing date.
• A day or so before closing, conduct a walk-through of the home to be sure it’s in proper condition. (If there’s a problem, your agent will need to contact the seller immediately to discuss possible remedies or adjustments at closing.)
• Determine whether any additional information or documentation will be required at closing.
• Bring a photo ID and closing funds.
• Sign a mountain of paperwork.
• Get the keys!

WHAT’S THE DEAL WITH A HOME WARRANTY?

As a part of the closing process, you might be offered the option of purchasing a home warranty. A typical price for a basic warranty can be around $500 per year, according to Realty Times. As with any other service contract offered with a major purchase, it has its pros and cons.

• The good: You’re likely to receive discounted (but not free!) service calls as well as repair and replacement of appliances and major systems such as electrical, plumbing, air conditioning and your furnace. Having a home warranty can provide some extra peace of mind, especially if you’ve purchased a distressed property.
• The not-so-good: There’s always fine print. Be sure to read the exclusions and limitations. You probably won’t be able to choose your service provider, and some implied services might require additional fees.

PREPARE FOR THE UNEXPECTED

Gathering around a table with stacks of documents to sign can be intimidating. Have a cup of coffee, chat a few moments and settle in. Take as much time as you need to read everything closely. This is your closing. There’s no hurry.

There might be last-minute glitches. A fee here or there may vary from the original estimate, but you deserve a full explanation for any changes. And your interest rate could change, unless you paid for a rate lock. (Do you have it in writing?) Most of the time, things go smoothly, but if it things spiral out of control, remain calm. You can’t be forced to close the deal if you’re suddenly uncomfortable with the process.

If you decide to walk away, ask how much money it will cost you. Almost certainly, you’ll lose the earnest money in escrow — and there can be additional damages for a contract default. It’s not a decision to take lightly.

Now that we’ve had that little moment of drama, relax. Expect things to go well. Just one more step and you’re home free.

When you buy a home, chances are the first thing on your mind isn’t the notion that a visitor might slip and fall in your kitchen and sue you. But it’s for just that type of scenario, among others, that it’s important to get homeowners insurance. (Not to mention your mortgage lender will generally require it.)

Finding the right insurance can be tricky because of the variety of policies available. Different types of policies will have different terms, conditions and exclusions. For instance, you might expect stolen valuables to be automatically replaced under a general policy, but, depending on your particular policy, that may not be the case. Here’s how to make sure you’re fully covered for the risks associated with owning a home.

WHAT’S COVERED?

To know how much coverage to buy, you’ll need an estimate of how much it would cost to replace your home (not including the land value) and a detailed inventory of your personal items. A basic home insurance policy typically provides four areas of coverage:

• The structure of your home: In the event that a natural disaster such as a wildfire damages or destroys your home, your policy will generally cover the cost to repair or rebuild it, as long as you’ve bought enough coverage. (Specifically, you’re covered for damage to both your house and structures attached to your house. This includes damage to plumbing, electrical wiring, heating and permanently installed air-conditioning systems.) Other natural disasters, such as flooding, are not included, so pay attention to exclusions.
• Personal belongings: If any of your personal belongings are stolen, you can receive a payout between 50% and 75% of your home’s value to replace those items. (You’re also generally covered if your possessions are damaged — or if they’re not on your property but with, say, your child at college.) Policy limits might not be high enough to cover some valuables, such as jewelry, art and electronics. Policyholders should also pay attention to whether their insurance compensates them for new replacement items (“replacement cost”) or for their depreciated value (“actual cash value”).
• Liability protection: Should an accident occur in your house or on your property, you could be held liable for damages and injuries. Homeowners insurance typically covers between $100,000 and $300,000 for lawsuits or expenses resulting from an accident such as a mail carrier slipping on your driveway.
• Displacement: If you’re unable to live in your house because a fire or other disaster has rendered it uninhabitable, your insurance will cover your additional living expenses. Most insurance companies will cap these expenses at 20% of your policy limits and require that it be used within one year of the disaster.

WHAT’S NOT COVERED?

Most insurance policies will cover damages and stolen goods that result from a fire, theft, lightning, explosions, vandalism and riots. But for other perils, you’ll have to find extra coverage through a separate policy.

For example, you’ll have to purchase separate policies for flood and earthquake insurance. Earthquake insurance premiums vary depending on what kind of house you have and where you live. Homeowners in low-risk areas may pay a few hundred dollars a year for earthquake insurance, while California homeowners may pay thousands.

Your insurance company may also refuse to pay out for damages caused by poor maintenance, termites, sinkholes, sewer backups, identity theft or running a business from your home. Other exclusions include war, nuclear spills and acts of terrorism.

Be aware that insurance policies may also have limits for valuables including jewelry, damage from mold or liability costs for dog bites or injuries from the use of swimming pools or trampolines. To get extra coverage for your valuables, consider a floater policy, which covers property that’s considered easily movable, such as jewelry. To increase liability coverage, you’ll want to buy what’s called an umbrella policy, which can cover you for $1 million or more.

HOW TO FIND QUALITY INSURERS

Start your comparison shopping for home insurance by first deciding exactly what you want covered and the size of the policy you’d like, so you can make an apples-to-apples comparison of prices and services. You can look up insurers in your state and customer complaints at your state insurance department here. For more information, you can check out an insurer’s ratings in Moody’s, Standard & Poor’sor A.M. Best.

House insurance premiums will fluctuate wildly even within the same ZIP code for the same insurer. Many factors affect your rates, including your age, marital status, what kind of house you have and even how close you live to a fire hydrant; and companies give different weights for each risk. So it’s best to research a few companies before choosing.

It’s also a good idea to periodically review your insurance policy and adjust it as your financial situation changes. You may find that you can save by raising your deductible, for example, or investing in a renovation that will make your home more eco-friendly.

YOU’RE COVERED

Insurance is something you hate to buy but love to have when you need it. And it doesn’t require much more than just occasional attention. Once you wade through the choices and get your coverage in place, you’ll have a good feeling that your biggest purchase is protected.

A home inspection is a lot like a test-driving a new car, only better. Instead of just punching the accelerator and a few dash buttons to see what they do, during a home inspection you’ll have a knowledgeable professional along with you, pointing out details and potential problems you might not notice otherwise.

A thorough home inspection can save you thousands of dollars in unexpected repairs — or from unwittingly buying a money pit.

WHAT A HOME INSPECTOR DOES

A home inspector will take two to three hours or more completing a detailed walk-through of the home you’re looking to buy. It’s a top-to-bottom review of the physical structure, as well as its mechanical and electrical systems — including roof, ceilings, walls, floors, windows and doors. The inspector will check that major appliances are functional, scrutinize the heating and air-conditioning system, examine the plumbing and electrical systems and crawl up into the attic and down into the basement.

All the while, the inspector will be taking notes and pictures and, if you’re tagging along, commenting on what he sees. Most importantly, the inspector will provide an objective opinion on the home’s condition, detached from the emotional roller coaster you’ve been on during the entire homebuying process.

WHAT A HOME INSPECTOR DOESN’T DO

A home inspection is a general checkup, not an X-ray exam. Although inspectors should have a keen eye for detail, they won’t be able to detect the unseen. That means hidden pests, asbestos, and mold or other potentially hazardous substances might go unnoticed. Those sort of issues can require specialized evaluations, perhaps even a geologist or structural engineer.

An inspector might have a thought or two on child safety issues found in the home, but again, that depends on the inspector’s experience and competencies. And a home inspector doesn’t necessarily determine whether your home is compliant with local building codes.

The goal of the inspection is to uncover issues with the home itself. Inspectors won’t tell you if you’re getting a good deal on the home or offer an opinion on the sale price.
An inspection is not a pass/fail exam. But you’ll learn much about your potential new home and gain confidence in the decision to move into your new address — or find out enough to pass on the purchase.

THE HOME INSPECTION REPORT

A good home inspection report is extensive, containing checklists, summaries, photographs and notes. It will estimate the remaining useful life of major systems and equipment, as well as that of the roof, structure, paint and finishes. The critical information you will gain will include recommended repairs and replacements, too.

Ask any potential inspector for samples of prior reports and note whether they’re simply completed checklists or extensive reviews. That way you’ll know whether you’re paying for a stapled 10-page report or for a three-ring binder of detailed information. Home inspections aren’t cheap; they can cost $300 to $500 or more, so you want to be sure you’re getting what you pay for.

HOW TO FIND A HOME INSPECTOR

You can also search the databases of professional associations, such as the National Association of Home Inspectors, the American Society of Home Inspectors and the International Association of Certified Home Inspectors. Such organizations usually require members to pass an exam, honor a code of ethics and complete continuing education.

It’s a best practice to interview candidates before making a decision. That’s when you can find out about experience, training and areas of expertise. For example, if you’re considering a fixer-upper or looking at an older home, you’ll want an inspector who has expertise and knowledge regarding renovations of historic structures. In some areas, home inspectors are affiliated with the state real estate commission and must be licensed and comply with state regulations and procedures.

And get references from prior clients, especially homeowners who have been in their home for at least six months. That way you can determine whether any issues popped up that were unreported in their inspection.

BE A PART OF THE PROCESS

It’s a good idea to join the inspector on his home tour. You don’t have to climb into the attic with him or crawl under the porch, but follow along where you can and take notes. He may make some great home improvement suggestions along the way — as well as point out peculiarities and unique features.

Although inspections can turn up serious defects, every house will have its imperfections. You might choose to think of many of these as simply endearing beauty marks.

Whether you’re a first-time homebuyer just learning about mortgages or you’re a seasoned homeowner looking to refinance, the choices can seem overwhelming. Here’s how to find the right mortgage and lock in the best rate.

THE BASICS OF MORTGAGES

A mortgage is a long-term home loan through a financial institution, with a house or other property serving as collateral. The most common types are fixed-rate mortgages and adjustable-rate mortgages.

Fixed-rate mortgage: This is most often available in 15-year and 30-year options. With a fixed mortgage, your interest rate remains the same for the life of the loan and you’ll always have the same monthly payment.

With a 30-year mortgage, your monthly payments will be lower since you have 15 more years to pay off the loan. However, you’ll pay less total interest over the life of a 15-year loan. Which loan is right for you depends in part on whether you can afford the higher monthly payments.

Adjustable rate mortgage: The interest rate on an ARM changes every year based on the market, but this loan might come with an initial fixed rate. For example, the rate on a 5/1 hybrid ARM is fixed for the first five years. After that, the rate adjusts annually based on the market.

The initial interest rate on an ARM is typically lower than for a fixed-rate mortgage. Generally speaking, ARMs make the most sense if you plan to sell or refinance your home before the initial fixed-rate period is up. For instance, if you are planning to sell your home in three to five years, a 5/1 ARM might make more sense for you than a 15- or 30-year fixed-rate mortgage.

Nonconforming mortgage: Government agencies Fannie Mae and Freddie Mac end up buying or backing most mortgages. But Fannie and Freddie will only deal with loans up to $417,000 (or $625,500 in Alaska, Guam, Hawaii and the U.S. Virgin Islands). Larger mortgages are “nonconforming.” These often come with higher interest rates.

HOW TO QUALIFY FOR THE BEST INTEREST RATE

Generally speaking, several outside factors influence how rates trend over time, including the Federal Reserve’s asset purchases, housing demand and the secondary market for mortgage-backed securities. But most of what affects your chances of getting the best rate at any given time lies within your control.

When deciding whether you’re a good risk for their money, lenders will study your income, credit score, employment history, liquid assets, down payment, the type of property you’re buying and its value. Here are specific steps you can take to help your cause:

1. Know your credit score

Your credit score is the foundation for your personal financial profile. The most commonly used score is issued by Fair Isaac Corp. (FICO) and grades you in five different areas, each making up a percentage of your grade. These are:

• payment history (35%)
• money owed (30%)
• length of credit history (15%)
• types of credit in use (10%)
• new credit (10%)

FICO scores range from 300 to 850; the higher the score, the better. The best candidates have low credit card and loan balances, and long histories of on-time payments and ongoing credit accounts, so make sure your credit report is error-free. You can access it for no cost at annualcreditreport.com, where you can see one copy every year from each of the three credit reporting agencies (Experian, TransUnion, and Equifax). If you find mistakes, contact the company to correct them.

2. Get out of debt

Too much debt makes you a bad risk. Lenders look at your debt-to-income ratio, or DTI, to determine whether you’ll qualify for the best current interest rate. Lower your DTI by paying down your plastic. This will most likely raise your FICO score as well.

3. Prepare your financial documents

In 2014, the Consumer Financial Protection Bureau implemented rules that protect you from loans for which you’re not qualified, so you’ll be less likely to suffer a mortgage default. As a result, lenders are under more pressure to diligently review your financial records. They’ll scrupulously look at your income, assets, debts and credit accounts. If they see anything out of the ordinary, they’ll request explanations, so keep copious records. A clean bill of financial health helps you qualify for a low mortgage interest rate.

4. Think about mortgage rate locks and points

With a rate lock, the lender commits to giving you a specific interest rate, even if your loan hasn’t yet closed. Read the Federal Reserve’s Consumer’s Guide to Mortgage Lock-Ins to learn more.

Another way to reduce your mortgage rate is to pay “points” (essentially, a set dollar amount of prepaid interest) in exchange for lowering your interest rate over the life of the loan by a certain amount. One “point” equals 1% of the amount of your mortgage. This strategy is generally more beneficial the longer you stay in your home. Points may also be tax deductible.

FHA LOANS

An FHA loan refers to a mortgage loan that is insured by the Federal Housing Administration. FHA loans are designed specifically for first-time homebuyers and usually only require a minimum down payment of 3.5%. They’re typically 30-year fixed mortgages.

FHA loans are very attractive for first-time homebuyers who might not be able to afford the desired 20% down payment that comes with a conventional mortgage. Imagine you find a home you really love for $300,000. You can afford the monthly payments, but not a $60,000 down payment plus closing costs. If you put 3.5% down, you’d only have to spend $10,500 upfront.

FHA loans may sound too good to be true — and there is a catch. Because you’re putting less than 20% down, you’ll have to pay two forms of mortgage insurance.

First, you’ll pay an upfront mortgage insurance premium of 1.75% of the loan. For example, on a $240,000 mortgage, you’ll pay $4,200. This is usually included in the mortgage, so you might not have to pay out of pocket.

Second, you will pay an annual mortgage insurance premium, which is charged monthly. The rate can fluctuate and your payment may vary. Say the current annual premium is 1.3% for a loan for less than $625,000 and a term greater than 15 years. On that $240,000 mortgage, you’d end up paying $3,120 a year, or $260 per month.

Bear in mind you can consider refinancing your mortgage to get rid of the FHA loan once you have enough equity in the home to do so.

VA loans

The Veterans Affairs loan program was created in 1944 to assist military service members with home purchases after returning from duty. A VA loan can offer up to 100% financing for a borrower, effectively canceling out the requirement of any down payment.

VA loans, which are backed by the federal government, are easier to qualify for than conventional mortgages because they require banks to take on less risk. VA loan borrowers generally can’t exceed a 41% debt-to-income ratio, and most VA-approved lenders are looking for a credit score of at least 620.

A VA loan borrower must have been an active-duty veteran with a minimum of 90 days of service during wars or 181 consecutive days of active service during peacetime. Alternatively, serving for six years in the National Guard or Reserves also qualifies an individual. And under certain conditions, a deceased veteran’s spouse can be eligible for a VA loan.

Of course, as with a conventional loan, VA loan borrowers must be able to provide sufficient required documentation to prove their veteran status, income, assets and liabilities. Applicants will also need to obtain a DD-214, showing proof of military service, and their Certificate of Eligibility, serving as proof of eligibility for the VA loan.

USDA LOANS

The U.S. Department of Agriculture has two programs to help people buy, build, fix up or move homes in rural areas.

First, the Single Family Housing Guaranteed Loan Program provides guarantees that allow people with low and moderate incomes to take out loans for 100% of a home’s cost.

The other program, Single Family Housing Direct Home Loans, provides direct subsidies that lower mortgage payments, allowing interest rates as low as 1%, with repayment over up to 33 years (38 years for very-low-income borrowers who cannot afford the 33-year payback). Borrowers must be low or very low earners who don’t have decent homes and can’t get loans from other sources on terms they can reasonably meet.

Homes funded through this program must be modestly sized for the area, be worth less than the program’s limit for the area, not have an in-ground pool and not be designed for moneymaking activities.

MAKING THE RIGHT CHOICE

Psychologists say many consumers, when faced with too many choices, will opt to make no choice at all — or make a hasty decision just to get past the agony. Mortgage loans have a lot of moving parts, and it’s easy to get overwhelmed trying to sort them all out.

Have every lender you speak to go over all the details of each loan package. Ask a bunch of questions, take notes … and then sleep on it. Talk it out with someone willing to listen. Perhaps realizing there may be no one best decision will help ease the anxiety. You’ve got this.

Buying a home usually includes a monster obstacle: coming up with a sufficient down payment. If you opt for a down payment of less than the traditional 20%, your lender will probably require you to buy mortgage insurance.

The concept behind mortgage insurance is the same as with other insurance plans: You pay a monthly premium to the insurer, who protects the mortgage lender in the event you default.

WHAT IS PMI?

Private mortgage insurance, or PMI, is insurance for the mortgage lender’s benefit, not yours. It’s a concession often required when your down payment on the purchase of a home is less than 20%. (If you’re planning to put down 20% or more, you won’t need to think about this.) Because lenders are assuming additional risk by accepting a lower amount of upfront money toward the purchase, they will often call for the borrower to purchase PMI.

PMI will pay the lender a portion of the balance of the principal due if you stop making payments on your loan. PMI will typically pay the difference between a conventional 20% down payment and what a borrower actually put down.

For example, if you put down 5% to purchase a home, PMI might cover the additional 15%. A loan default triggers the policy payout as well as foreclosure proceedings, so that the lender can repossess the home and sell it in an attempt to regain the balance of what is owed.

HOW MUCH DOES PMI COST?

The cost of PMI is based on the size of the loan you are applying for, your down payment and your credit score. The average annual cost can be from 0.5% to 1% or more of the loan amount, which is divided by 12 and added to your monthly house note.

WHEN CAN YOU CANCEL PMI?

Once your mortgage principal balance is less than 80% of the original appraised value or the current market value of your home, whichever is less, you can generally cancel the PMI. (This often happens thanks to appreciation in a home’s value, since all of that extra value goes to you.) Often there are additional restrictions, such as a history of timely payments and the absence of a second mortgage.

Mortgage lenders are required to tell you at closing how long it will take for you to reach that loan-to-value mark and update you annually of any cancellation options. Generally, mortgage lenders are required to cancel PMI once the mortgage balance dips down to 78% of original value.

PMI can also be terminated if you reach the midpoint of your payoff. For example, if you took out a 30-year loan and you’ve completed 15 years of payments, PMI may be terminated.

MORTGAGE INSURANCE FOR FHA AND VA LOANS

Mortgage insurance for loans guaranteed by the Federal Housing Administration(FHA) and Department of Veterans Affairs (VA) operates a little differently from conventional mortgages. (Read ahead for more general information on both these loans.)

VA loans to active, disabled or retired military servicemembers and their eligible surviving spouses never require mortgage insurance, but most borrowers will pay a “funding fee” ranging between roughly 0.5% and 3.3%. This fee depends on a wide variety of factors, including whether you’ve applied for a VA loan before and how much money you’re putting down, if any.

VA loans are also available to certain reservists and National Guard members. Others may also qualify. The VA Eligibility Center has details at 888-768-2132.

Mortgages backed by the FHA require a 1.75% upfront mortgage insurance payment as well as monthly mortgage insurance premiums ranging from .45% to 1.05%, depending on the loan term and amount. (Premium rates as of January 2015.)

THE DOWN PAYMENT DECISION

Mortgage insurance allows a lot of people to become homeowners who otherwise might not be able to. And it’s natural to want to put down as little money as possible, but you’ll want to consider the real costs now and down the road.

The way the system works is: The larger the down payment, the better your financing deal. You’ll get a lower mortgage interest rate, pay fewer fees and gain equity in your home more rapidly. But ultimately it’s a matter of balancing your short-term financial capabilities with the realities of your local real estate market and your future savings and earnings potential to determine the best long-term financial result for you.

When you apply for a mortgage, you’re quoted an interest rate. But it’s possible for that rate to change by the time you sign your home loan. If you want to avoid that risk, you can take advantage of a rate lock, which commits the lender to giving you the original interest rate.

WHAT IS A RATE LOCK?

A rate lock, also known as a lock-in, is an agreement between borrower and lender that guarantees a fixed interest rate on a mortgage, provided that a loan is closed in a specified time period, typically 30 to 60 days. A rate lock may also specify the number of points you’ll pay.

Lock in a rate when you see the one you want — this can be when you first apply for the loan, or later in the process — and make sure it’s for a long enough term to allow you to finish submitting paperwork and get approved. (Although you can lock in a rate at any time, it’s generally smarter to wait until you have a purchase agreement in place.)

Rate lock prevents your interest rate from rising, but it can also keeping it from going down too! Look for loans that offer a “float down” policy, in which your rate can fall with the market, but not rise.
HOW MUCH DOES A RATE LOCK COST?

Rate lock fees can take many forms: They could be a percentage of your mortgage amount, a flat one-time fee, or simply figured into your interest rate. Rate locks of fewer than 60 days, for example, will run you at least a couple hundred bucks or up to 0.5% of the total loan amount. The longer you lock your rate past 60 days, the more you’ll pay.

WHAT ARE THE DIFFERENT KINDS OF RATE LOCKS?

Among the different types of agreements:

Locked rate, locked points: Neither the interest rate nor the number of points paid upfront may change.
Locked rate, floating points: The lender must offer you the same interest rate but can charge you a different number of points (an upfront fee expressed as a percentage of the loan), so you may pay more at closing.
Floating rate, floating points: You can lock in your rate and points at some time after the application but before settlement.
SHOULD YOU LOCK IN YOUR RATE?

A rate lock is basically a hedge: You’re worried that a higher interest rate would put your mortgage out of reach, so you’re willing to pay money upfront to prevent this from happening. Remember that rate locks operate under the same principle as insurance. Most people will lose money, but it may be worth it if an increased interest rate would be catastrophic for you.

IF YOU WANT A RATE LOCK, READ THE FINE PRINT

If you decide to go the rate-lock route, make sure you cover your bases.

Get it in writing. Get a blank copy of the agreement to see whether you’ll be charged if your application is denied, whether you’ll be able to take advantage of lower market rates or whether your points can change.

Get it done, and fast. As much as possible, try to get your loan approved within the rate period. This means providing the lender with relevant documentation — including W-2s, the purchase contract for the house, and debt information — as soon as possible. If you don’t close within the lock period, your rate may rise with the market. Lenders sometimes offer a rate lock extension for a fee.

Be ready to commit. If you aren’t sure you want to buy the house for which you’re getting the mortgage, a rate lock probably isn’t a good idea. Finding a willing seller can take a while, and there’s no guarantee that you’ll be able to close the sale before the lock period ends.

SUDDENLY, A NEW INTEREST

When you’re serious about buying a home, all of a sudden you’ll notice interest rates — probably more than you ever have before. And with good reason: Your mortgage payment, and the amount of interest you pay over the life of the loan, directly impacts the wealth you’ll build during your peak earning years. Little changes in rates, amplified over a long period of time, make a big difference.

It might be the most informative document you receive in the entire homebuying process: A good-faith estimate, or GFE, is a form provided by your mortgage lender that breaks down all of the charges, fees and terms associated with your home loan.

Your GFE also includes an estimate of the total you can expect to pay at settlement (or closing) — essentially, how big the first check you write will be. A mortgage provider is required by law to give you a GFE, or all information required to make such an estimate, within three days of receiving your loan application.

WHAT’S THE POINT OF A GFE?

A GFE will provide you with the necessary information about your loan, helping you compare loan offers with different lenders, terms and fee structures. But a GFE is not a binding contract, so if you decline the loan, you won’t have to pay the fees listed.

WHEN WON’T I RECEIVE A GFE?

The only time a GFE won’t be required by a lender is if your loan is denied before three days have elapsed. If that’s the case, the lender must, within the next 30 days, either tell you why your loan was denied or notify you of your right to ask why. If you are denied, you should ask for specific reasons. Credit reporting mistakes do happen.

Lenders can’t hold your GFE hostage by requiring you to provide documents such as pay stubs or W-2s to verify the information provided on your application. However, once they’re considering final approval of your loan, they can ask for additional information and will often require you to provide these or other documents.

WHAT SERVICES LISTED ON THE GFE CAN I SHOP AROUND FOR?

Though your lender requires certain services and will recommend providers, you can and should shop around; at the very least, you’ll then know whether the recommended provider’s estimate is reasonable. A few services to shop for include:

• Lawyer’s fees
• Title services and title insurance
• Homeowner’s insurance

If you’re unsure of what a fee includes or whether you can shop around, ask your lender for an explanation.

The GFE will be the first of many documents that you’ll deal with on your journey to buy a home. As with all of the paperwork, you have the right to understand every item, ask questions and be totally comfortable with the answers.

After all, every number on that list represents money out of your pocket.

When making an offer, a real estate agent brings some pretty powerful assets to the table: market knowledge, objectivity and (hopefully) some well-honed negotiating skills. Buying a home is emotional, and your agent can help level the field by bringing a more rational approach to the transaction. Here’s how the two of you can work together to get the best possible deal.

DON’T IGNORE THE MARKET

We’ve talked about knowing your market before buying. When it comes to making an offer, it’s more important than ever to consider a home’s value — which might not be the same as its listing price. Carefully study the comparative market analysis provided by your real estate agent. When researching the home and neighborhood’s value online, compare the estimates which can range widely.

Your agent will help you interpret the data and establish a fair offer price.

STAYING SANE IN A SELLER’S MARKET

In hot markets, it’s easy to get caught up in auction fever. Your agent can help keep you focused only on what you can control. If a number of buyers are interested in the same home, make your first bid your best offer.

If you’re really motivated to buy a particular property, consider putting together two or more offers in advance. That way, if there are no competing offers, your agent can submit the lowest. The higher offers can be the go-to bids if there’s a crowded field.

FIND OUT WHY THE SELLER IS MOVING

The seller usually wants to sell as much as, if not more than, you want to buy. He has just one house to sell; you have a market full of opportunities. Of course, this is less of a factor in a strong seller’s market where inventory is low. But if the seller has already signed a contract on his next home, or if there’s a divorce in the mix or a job relocation timetable in play, that’s all good information to have. Have your real estate agent do as much recon as possible.

KEEP THE CONTINGENCIES IN CHECK

In competitive real estate markets, contingencies can be deal killers. When it comes to conditions, get creative. Forget the little stuff and concentrate on major issues that must be addressed — and offer alternatives.

For example, if an inspection reveals necessary repairs, ask for a credit adjustment to be applied at closing, rather than putting the onus of contracting and completing the repair work on the owner. Anything you can do to ease the sales process and shorten the time to loan closing may work in your favor.

MAKE SURE YOUR AGENT IS A STRONG ADVOCATE

Ideally, your buyer’s agent is both a master negotiator and your biggest advocate. For sellers, it’s not always just about the money. If your agent is singing your praises (you’re preapproved, love the neighborhood, offering a bigger down payment), you might score the edge in what would have been a tie. Personalities play a part in any human interaction.

How a seller is treated — and how a buyer is represented — can often make or break a real estate deal. Make sure your agent is at least pretending to be your biggest fan.

IF IT’S A NO, MOVE ON

Having a deal go south on you is going to hurt. You can wallow in your disappointment for as long as you want, or for about an hour — whichever comes first. Think of it this way: You’re not starting over; you’ve already eliminated a lot of the variables. You know how this whole thing works now. It’s just a matter of finding the right house.

But first, if you lost in a multiple-offer situation, see if your agent can get your bid in a backup position. Deals fall through, and if the accepted offer does crater — because of a loan snag, a broken contingency, whatever — you might be in a prime position to rescue a sale.

In the meantime, in addition to revisiting your house runners-up, consider asking your real estate agent to gather up some older or expired listings. Many buyers neglect this segment of the market. If a house has been on the market for a while without selling, you’ve got some leverage, perhaps even a motivated seller.

GETTING THE DEAL DONE

Congratulations! You finally have a signed contract in hand and can almost smell the green grass (desert blooms, pine-covered mountains, salty sea air) of your new neighborhood. You’re like a long-distance runner stretching for the finish-line tape.

It might be called a purchase agreement, a formal offer or a sales agreement, but no matter the name, it’s the official paperwork that begins the homebuying process. Although it might feel like it’s taken forever to get to this point, some of the most important work is still to come. Here’s a checklist to help get you through the offer-making process.

[ ] First, if you haven’t done so already, make sure you’re preapproved through a lender.

[ ] Determine a justifiable and fair offer price for the home you’re interested in. This can be based on comparable sales as well as other market information from your own research or a comparative market analysis provided by your real estate agent.

[ ] Verify the down payment required by your lender is in the bank and ready to go.

[ ] Make sure you have the necessary funds at hand to cover closing costs (somewhere around 3% of the purchase price).

[ ] Have your good-faith deposit (earnest money) ready as well. That’s often between 1% and 3% of the purchase price, and might be more in a hot market.

[ ] Verify that the offer agreement details the terms of the earnest money, including its disposition upon the acceptance or rejection of the offer.

[ ] Negotiate for the seller (or even the lender) to pay some of the closing costs or other prepaid items, such as taxes. Some lenders may cap the amount of seller participation in these expenses.

[ ] Determine which contingencies to include in your offer. These might include:

• Final loan approval
• The home passing a standard inspection
• Repair, replacement and/or improvement of issues revealed during the inspection
• Verification of the home’s value by a licensed appraiser (lenders will insist on this)
• Whether the transaction is contingent upon the sale of a home you currently own
• Lenders, or state and local laws, may require other contingencies.

[ ] Establish a time frame in which to receive proper disclosures from the owner regarding improvements and the condition of the property. This can include revealing natural hazards, neighborhood issues, homeowner association obligations and more. Local and state laws might require additional disclosures as well. The sales agreement should also address the number of days you have to review the disclosures, as well as your ability to modify or withdraw your offer based on these disclosures.

[ ] Decide whether to enclose a personal letter to the owner. (It’s not required, but some buyers do this to explain the offer’s price rationale — or to make a personal appeal for an offer to be given additional consideration.)

[ ] Establish an expiration time and date for your offer. In hot markets, this can be mere hours — but in most cases it’s one or two days.

[ ] Set a time frame for a loan closing date (often 30 to 60 days).

[ ] Specify the number of days after closing until you may begin occupying the property, allowing ample time for an owner-occupied property to be vacated.

In some states, it’s required for a lawyer to prepare, or at least review, the written offer. Even if it’s not mandated, it’s a good thing to consider. Many purchase agreements are generated with standard, state-approved forms provided by your real estate agent. Boilerplate documents are handy, but be aware that they aren’t generated specifically in your best interest. Having an attorney on your side of the transaction may be worth the added cost.

No matter how you generate the formal offer, you want to be sure it complies with prevailing laws in your area. This is too big a purchase to leave out important details or required language that might torpedo your deal.