Getting The Best Rate Possible
If youre at that point in your life where youve finally made the monumental decision to purchase a house, heres a tip for you: before you even start looking at homes, make sure you have a mortgage loan locked in.
After all, its rare for someone to have enough cash to pay full price for a house, so the amount of mortgage you qualify for will determine the price range of houses you can consider.
Getting a mortgage with the best rate is the key, and while the shopping process may be complicated and frustrating, being able to enjoy your new home without so much financial stress will be well worth it. Here is some information that may help guide you in finding the right mortgage loan for you.
SEE ALSO: Finding the Right Mortgage Lender
Understand The Basics
Its easier to know what youre getting into if you have all the fundamentals down first, so lets start at the beginning. What is a mortgage loan? Essentially, a mortgage loan is when a bank or lender lends money to a borrower in exchange for a piece of property or real estate. The borrower then pays back the loan in installments over a set span of time.
Qualification for a mortgage will vary from lender to lender, but for the most part, the amount you can receive will be based on your income and assets.
When you apply for a mortgage loan, you need to tell the lender what job you have, how much you make, your credit score, and how much cash you have for a down payment. After punching in the numbers, theyll let you know if youre qualified and for how much.
After finding out how much you get approved for, there are typically two types of mortgage loans a homebuyer can choose from
- Fixed-Rate Mortgage (FRM): The interest remains the same throughout the duration of the loan, (usually 15, 20, or 30 years), so you pay the same every month, even if interest rates rise. An FRM is good for buyers planning to stay at the home for more than five years, because they wont have to worry about their rates going up.
- Adjustable Rate Mortgage (ARM): The interest changes after a fixed-rate period based on the interest rate. There is always an agreed upon payment cap, both high and low, and loan duration. ARMs are better for those who plan to move within a few years, since the initial interest rates start low and increase after a time.
Compare All Your Options
Now that you have a better understanding of mortgages, you can start focusing on your options. In order to determine which mortgage rate is best for you, you need to shop around.
Compare the quotes of several banks and lenders and see which one suits your needs the most.
Try not to focus solely on the quoted interest rate, assuming that the lowest offer will be the most affordable. There are other factors you need to consider if you wish to compare mortgage quotes effectively. In addition to the interest rate quoted, you need to pay attention to
- The lock period, or expiration date, on the offer
- The length of the loan
- Whether the interest rate is fixed or variable
- Any points associated with the rate
- Closing costs
Mortgage points, or discount points, are also something to keep in mind. Some lenders offer the opportunity to purchase up to four discount points, with one point costing 1% of your total mortgage and reducing your interest by around 0.125%, at the onset of your loan. So, if you have a 30-year FRM at $200,000 with 5% interest, two mortgage points will cost you $4,000 upfront, and reduce your interest to 4.75%.
Examine The Details
Once youve submitted a loan application, lenders are required to mail you a Good Faith Estimate (GFE), which outlines the fees that will be due at closing, within three days. You can use your GFEs to compare the rates each lender offers you.
SEE ALSO: Mortgage Savvy: The Good Faith Estimate
For the best results, compare offers that are as similar as possible.
Analyze quotes for the same loan type and lock period, then determine the differences between each offer in terms of discount points and closing costs.
Shopping for a mortgage doesnt have to be mystifying if you take the time to compare the difference between seemingly identical offers. Choose the lender with the most affordable mortgage quote to suit your needs and you will not regret it.