Get The Best Loan Terms
When you go to buy a home, if you are like most people you are going to need to get a loan. Because you are borrowing money, you will naturally have to pay a certain amount of interest to the lender.
But many home buyers do not realize that the amount of interest you pay, along with other fees, can vary substantially depending on which bank you use.
Nobody wants to overpay on their mortgage. To avoid spending too much, it is worthwhile to shop around when you are looking for a loan and to consider the big picture before you go to a particular lender.
Only by considering all the important factors – including interest rate, points, and fees – can you determine what makes a loan the best for you.
If you stop and take a look what less desirable terms can cost you over the length of the loan, it is considerable. Understanding how to get the best mortgage interest rates becomes critical for maximizing your long-term financial picture.
The thought of getting the best mortgage terms possible is something that is naturally appealing to most people.
Things To Consider About Your Loan
There are several aspects to getting a mortgage loan that you need to look at, including:
The interest rate is what you will hear about most, and for good reason. The interest rate is the primary driving force in the costs of taking out a loan.
It makes sense to look for the lowest interest rate you can get, and improve your credit score to get an even better interest rate. You should be going for the lowest interest rate you can find. However, there are other costs that you should also look at like all the various fees lenders may charge.
While getting a low-interest rate is important, if the other charges involved with getting this low rate are exorbitant it can make the whole deal less desirable, especially if you will only be in the home for a short period.
The lender will always charge fees for various things as part of the loan. Other parties may also charge fees, depending on the sale. When you get an estimate for a loan, you should ask the lender to separate out the bank fees from the third-party fees so you can get a clearer picture of who is charging you what.
The costs charged in a loan can change the overall attractiveness, even if the interest rate is lower. This is something that should always be considered.
There will almost always need to be some form of down payment. The required down payment can vary, though. The amount of the down payment can also affect the other costs of the loan. The most common types of loans for purchasing homes include conventional, FHA, VA and USDA.
Each of these types of loan programs has varying amounts of down payment requirements. Finding the right type of mortgage could depend on many factors associated with these loan products.
Conventional loans – generally speaking, the minimum down payment with a conventional loan is 5%. This is not to say that most buyers don’t put more money down. In fact, they do.
FHA loans – these types of mortgages are very popular due to the fact you are only required to put down 3.5% as a down payment. FHA loans can be attractive for a borrower who has a good income but does not have a lot of money saved for a down payment.
USDA loans – are used in areas that are considered “rural.” There are in fact maximum population requirements to take advantage of this type of loan product. You must also meet certain income guidelines. This, however, is one of only a few true no down payment loan programs.
VA loans – a VA loan stands for veterans administration and is a loan product specifically for veterans or those who have served our country in the military. The attraction of a VA loan is also the fact it is a no down payment loan product.
There are two types of points in a mortgage – origination and discount. Your lender may charge origination points for giving you the loan. You may buy discount points for your loan. Each discount point you buy is worth 0.25 percent, so if you bought four points, you would drop the interest rate by a point.
Buying points may be a way for you to wind up paying less for your mortgage, but not always. Have the lenders talk about the points in dollars so you can get a clear picture of the benefits they will offer you over the life of the loan.
There are times when it makes sense to pay points and others when it does not. A mortgage point is one percent of the amount you are mortgaging. For example, if you are mortgaging $350,000 one point would equal $3500.
When you pay points with your mortgage, you are essentially buying down your loan rate. The more points you generally pay, the more attractive rate you will receive.
The way to figure out if you should be paying points or not is by projecting how long you will stay in the home. What you need to calculate is the difference in mortgage payments between paying points and not paying points.
There will be a certain length of time whereby the difference in these two situations will be made up by how long you remain at the property. The longer you stay in your home, the more it makes sense to pay points.
Closing costs can certainly make or break the overall costs involved with paying a mortgage. Given the variable nature of closing costs, it is important to understand exactly what you are paying.
When factored into the loan it can really change what you are paying compared to other loan programs where the closing fees are not as high.
When purchasing a home sometimes it can be advantageous to ask the seller to pay for a portion of your closing costs as part of the acquisition. If the seller is still netting what they want, this can be a win-win for both buyer and seller!
You should find out from the lender if private mortgage insurance were required on the loan so you can factor all of your costs. In most circumstances, mortgage insurance will be necessary when you are not putting 20 percent down.
These mortgage insurance premiums can be expensive so if you can avoid paying them it is a good idea financially.
Have Your Financial Ducks Lined Up
When you are ready to purchase a home, it is sage advice to go out and get a mortgage pre-approval beforehand. This will show the seller you are serious about buying a home and give them comfort that you are financially qualified to do so.
Do not make the mistake of handing your real estate agent a pre-qualification letter. This is very different than a pre-approval.
In fact, it does very little for anyone because there is no verification of employment, income, or credit history. These are all requirements of getting a mortgage.
Getting The Best Mortgage
Although you may be limited on just how much you can save on your mortgage, there are things you can do to minimize excess expenses. Some of this includes:
Paying Attention To How Your Credit Score Affects Your Loan
Your credit score can have a surprising effect on the final amount you pay for your mortgage and is something you should pay careful attention to as you start to consider getting a loan.
If there are relatively easy ways to boost your score a little – like settling collection debts and paying down credit cards – then you should seriously think about doing those first if you want the lowest mortgage rate.
This is one of the things discussed at length in how to go about getting a mortgage, including cleaning up any mistakes on your credit report.
You can talk to a financial adviser or a non-profit debt counselor about your options to repair your credit.
You could also ask the lender how much a difference a better score would make for your loan.
Repairing your credit is a viable way to lower a mortgage cost in many cases, but only you can determine if the payoff is worth the extra work and if its worth putting off buying a home.
Getting Detailed Good Faith Estimates
Each lender you talk to will give you a Good Faith Estimate that lists all of the terms of the loan.
These are where you can see the different interest rates, fees, and other costs.
You can compare these estimates to determine which lender is giving you the terms that benefit you most.
When you go to each lender for an estimate, the loan agent will usually put down most of the information you need. But if you require more details, or information presented in a certain way, you can ask for it.
As stated before, you can ask for lender’s fees and third-party fees to be differentiated. You can also request that points be described in dollar amounts.
Feel Free To Negotiate
You can usually negotiate the terms of the mortgage offer, especially the fees that the lender charges. You may prefer the terms most of the terms of the loan, but not all. You always have the option of requesting an adjustment and should not be afraid to do so if you want the best deal.
Determine What Is Most Important To You
Each borrower has different priorities and different goals. If there are terms that you like about a loan, which works for your needs, then go ahead and prioritize them. Most people are focused on paying as little as possible, which is an entirely reasonable goal, but it is also OK to pay a bit more for terms that fit your needs.
For example, maybe you can get a variable rate mortgage with better terms than a fixed rate. This could be perfect for the buyer who knows they will not be staying in a home for an extended period.
Balancing the expected time frame in a home vs. the rate and terms is something that should always be looked at when purchasing a property. Not too long ago I had a client who was buying real estate in Medway MA but knew they would not be staying for an extended period. They ended up choosing a mortgage program that fixed the rate for seven years but then it turned into a variable rate.
The terms and conditions of the loan were better than a thirty year fixed. The buyer was not worried because the belief is they will be gone by then.
Other Financial and Mortgage Articles Worth Reading
- The most common loan programs reviewed via Tim Lucas of My Mortgage Insider.
- Why good faith estimates are so important when getting a mortgage via Rochester Real Estate Blog.
- How much home can I afford to buy based on my mortgage qualifications via Frederick Real Estate Online.
Use these additional articles to get a better handle on the mortgage process, as well as getting yourself the best mortgage terms possible!
About the Author: The above Real Estate information on how to avoid overpaying for a mortgage was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at [email protected] or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 32+ Years.
Are you thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!
I service Real Estate sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton and Uxbridge MA.