The vast majority of Americans buy homes with a mortgage loan and this is typically the largest loan you will every have. It is worth some time and effort to investigate how to get the most for your money at the lowest cost.
Contact Multiple Lenders
When buying a home it is important to recognize the importance of shopping around for the best deal. Most lenders will consider the same factors when you apply for a mortgage loan such as: employment history, income to debt ratio, assets and, credit record. While the process and considerations are fairly consistent when applying for a home loan, the array of what lenders offer is sometimes vastly different.
Contact at least three different lenders. Ask each lender for information about the same loan amount, the same type of loan and same term of loan and then make a comparison of their responses. After assessing what each lender has to offer, you can and should negotiate for the best deal. Obtain a break down of all the costs associated with the loan. You can then ask to waive or reduce one or more of the lender’s fees or agree to a lower rate or fewer points. Do not hesitate to make lender compete for your business. Let them know you are shopping for the best deal.
Analyze Different Types of Loans
Mortgage loans can be broadly classified as fixed-rate or adjustable-rate loans. Fixed-rate mortgages are often considered the best option. These loans offer predictability because your principal and interest rate stay the same for the length of the loan.
Adjustable-rate mortgage, (ARMs), typically start with a lower rate than a fixed-rate loan, but your rate and payment will change and could increase quickly. It is important to understand the all the implications if you decide to use an adjustable-rate mortgage. Depending on the rate change, your payment could increase by hundreds of dollars a month.
In some circumstances an ARM might be a viable option. If you are certain your income will increase over time, you would likely be able to buy a better home with the lower initial interest rate. When your income increased you could then refinance into a fixed rate loan. Another consideration for an ARM is if you plan to stay in the home for less than 5 years. The lower interest rate would be fiscally smart as long as there is no prepayment penalties or additional charges for selling the home before the interest rate increases.
Lock In Your Interest Rate
When borrowing money, no one will argue the importance of securing the best interest rate possible. A lower interest rate can save you a significant amount of money over the term of your loan. Many factors affect interest rates and rates seem fluctuate daily. The loan market is difficult to predict and the experts who project long-term trends are often wrong.
When you are ready to purchase a home, it is advisable to submit your application and lock in an interest rate as soon as you can. A rate lock protects you from rate fluctuations for the duration of the lock period, typically 30-90 days. “It guarantees that the lender will offer the borrower a specific combination of interest rate and points, according to Greg Cook, senior loan officer with Platinum Home Mortgage in Temecula, California. A point is a fee or rebate equal to 1 percent of the loan amount.”
Another important reason to lock in your interest rate is to keep your down payment constant. If you do not lock in and interest rates increase, your lender may require a larger down payment in order to meet lending requirements.
Contemplate Prepaying Discount Points
Discount points are prepaid interest on a mortgage loan. Even if you received a great loan rate, buying discount points will allow you decrease the rate a little. Paying for points up front, will lower your interest rate and monthly payment. One point is 1% of the loan amount. Buying points may also give you a tax benefit. Like all potential tax breaks, this is best confirmed by speaking to a tax professional before making the assumption.
Dismiss Private Mortgage Insurance
Private or PMI, is an insurance policy that protects the lender against loss if you fail to pay your mortgage. If you purchase a home with a down payment of 20% or more, you will not be required to carry a PMI policy.
A down payment of 20% or more is also likely provide the best interest rates as well as the most loan options. Additionally the cost savings by avoiding PMI can be significant. Consider this scenario cited by Glenn Curtis from a May 2016 article for Investopedia. “Private mortgage insurance typically costs between 0.5% to 1% of the entire loan amount on an annual basis. On a $100,000 loan this means the homeowner could be paying as much as $1,000 a year, or $83.33 per month – assuming a 1% PMI fee. (Calculated as: $100,000 x 1% = $1,000 / 12 = $83.33) By itself that’s a pretty hefty sum. However, the average home price, according to the National Association of Realtors is about $230,000, which means families could be spending nearly $200 a month on the insurance. That’s as much as a car payment!”
Buying a home can be one of the most satisfying of all life experiences! Hopefully these tips will provide you with some tools to ensure that you will be able to afford your home and not lose sleep over worry about paying the mortgage.
