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Buying a home is one of the biggest financial decisions you will make in your life. And choosing the right mortgage is one of the most important parts of the buying process.
Mortgages come in all shapes and sizes, and interest rates can vary widely from lender to lender. The interest rate represents the price of borrowing money – and even a small difference in rate can equate to a drastic difference in your total costs.
For example, if you take a 30-year fixed-rate mortgage with a 3% interest rate, your monthly payment will be $843 and you’ll pay $103,555 in interest over the life of the loan. But that same loan with a 5% interest rate will cost you $1,074 per month and $186,512 in interest charges.
Just a 2% difference in your interest rate equates to nearly $83,000 in additional interest expense over the life of the loan.
So when you’re shopping for a mortgage, you want to make sure you’re getting the best mortgage rate. Here are nine tips to help you do that and save money on your mortgage in other ways.
1. Use a mortgage calculator
Mortgages are complex and even minor changes to their terms can significantly affect your overall costs. A good first step to gain insight into your future mortgage is: try a mortgage calculator. A good mortgage calculator is available online and will allow you to adjust the interest rate and terms of a mortgage and see how that affects the monthly payment and the total cost. It can also help you get an idea of how much you can afford.
You can compare mortgage rates from multiple lenders through Credible.
2. Improve your credit score
Your credit score plays an important role in determining the mortgage rate offered to you. Lenders consider credit scores to be representative of how likely you are to repay a loan. The higher your score, the better the interest you are likely to receive.
Many lenders also have minimum credit scores to qualify for a conventional mortgage. You need a score of at least 620 to get most conventional mortgages, and a score of 580 or higher to get the lowest down payment requirement for an FHA loan.
However, the best mortgage rates go to those with credit scores in the mid-700s or higher. If your score is lower, consider focusing on improving your score before applying for a mortgage.
Request copies of your credit report from the three major credit bureaus using a site like AnnualCreditReport.com (you are owed a free copy every year). Check them out to see if there are any errors to dispute. Commit yourself to paying all your bills on time, paying off debt, and staying well below the credit limit on your credit cards.
3. Lower your debt-to-income ratio
Your “debt-to-income (DTI) ratio” is an important metric that lenders use when evaluating mortgage applications. DTI measures all of your monthly obligations compared to how much money you make. Lenders consider DTI to see if you can handle your monthly mortgage payments.
A higher debt-income ratio could mean that you have more difficulty with mortgage payments. A ratio of 43% or higher (including your potential mortgage payment) is considered risky, and a ratio of 50% is the maximum for many types of mortgages, including Fannie Mae’s.
If you pay off your debt, you are more likely to qualify for a mortgage and get a better interest rate. Consider spending some time reducing the balance on your credit cards or paying off loans before applying for a mortgage.
4. Research Home Buying Tools
Many state and federal programs can help you afford a home, especially if you’re buying a home for the first time. Federal programs include:
- FHA loans. These loans, insured by the Department of Housing and Urban Development (HUD), help people with lower credit scores qualify for a low-deposit mortgage.
- VA loans. Eligible Service Members and Veterans may be eligible for a no down payment mortgage.
- USDA loans. People in rural areas may qualify for fixed-rate, lower-cost mortgages with no down payment.
- Property coupons. These are available to eligible low-income people who need help buying a home.
States often have more robust home buying programs, including down payments. Contact your state housing corporation or a HUD field office for more information about these programs. Your lender may also be able to help you find it.
5. Make a minimum deposit of 20% to avoid PMI
Some lenders and loan types allow you to buy a home with a small down payment. But if you put less than 20% down on a property, you need to buy private mortgage insurance.
Private mortgage insurance, commonly called PMI, protects your lender if you don’t make your mortgage payments. Typically, you pay a monthly PMI premium as part of your regular mortgage payment until you qualify to drop the insurance.
Monthly PMI premiums range from $30 to $70 for every $100,000 you borrow, according to Freddie Mac. So if you want to buy a $250,000 home, put down 10% ($25,000) and finance the rest ($225,000), your monthly PMI payment would be at least $60, but could end up north of $140.
Because PMI comes at an additional cost, saving a 20% down payment can help you save money later.
6. Choose a shorter loan term
A 30-year mortgage may be the most common, but you have multiple options when it comes to the length of your mortgage loan. Mortgage lenders usually also offer mortgages with a term of 10 years, 15 years or 20 years.
The shorter the term of your mortgage, the higher your monthly payments are usually. But you also get lower mortgage rates and pay significantly less interest over the term of the loan. If you can afford the higher monthly fee, you will save a lot of money in the long run with a shorter term.
Credible makes it easy to compare mortgage rates for different conditions from multiple lenders.
7. Choose the best mortgage type for you
Different mortgage products work better for people with different financial situations. Here are the most common types of mortgage loans:
- Conventional loans. This category of loans refers to mortgages that are not part of a particular government program. Usually, they are known as “conforming” loans that conform to Federal Housing Finance Agency rules. These loans are usually best for those with good credit who are looking for a low mortgage rate.
- Jumbo loans. These loans exceed the limits set for conforming loans ($548,250 in 2021). Jumbo loans can reach $1 million or more.
- FHA loans. These mortgages come from private lenders but are insured by the federal government, allowing people who might not otherwise qualify for a mortgage to buy a home. They can be great for people who don’t qualify for a conventional loan, but can be more expensive in the long run.
- VA loans. These mortgages are a benefit that the Department of Veterans Affairs offers to service workers and veterans. Eligible borrowers can purchase a home without a down payment.
- USDA loans. These U.S. Department of Agriculture programs either lend money directly to low-income rural people or insure loans from private lenders. They offer no down payment loans to those who qualify.
8. Consider Paying Upfront for Interest Rate Cuts
When you pay points when taking out your mortgage, you are essentially paying a fee in exchange for a lower interest rate. Your lender may also call this discount points, mortgage points, or prepaid interest.
A point is generally 1% of the loan amount. The amount each point will lower your interest rate depends on the lender.
Paying points makes the most sense when you know you’ll be in the house for a longer period of time. It takes time for the reduced interest and lower monthly payment to recoup the money you pay for points upfront.
9. Shop for Rates
It is good practice to compare at least five different loan estimates to find the best interest rate. Doing this can save you an average of $3,000, according to Freddie Mac.
Using a service like Credible can make shopping with rates easier. You only need to enter your details once and then you can check rates with multiple lenders.
As you evaluate various loan offers, keep in mind more than just mortgage interest rates. Also look at fees, closing costs and other costs that may affect the total amount you pay.
Because there are so many costs associated with buying a home and getting a mortgage, it’s a good idea to also compare APRs from different lenders. APR includes the interest and all other costs of the mortgage so it can give a better idea of the total cost of a loan.
The post 9 tips to get the best mortgage rate appeared first on Notesradar.
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