Buying a house may be the biggest investment you make in your lifetime. If so, carrying a mortgage loan is likely the largest debt you’ll incur. Signing a mortgage is a huge commitment — one that you’re making for 15 or 30 years.
For these reasons, it’s important to know exactly what you’re getting and what you’re paying with your mortgage lender. Traditional advice is to shop mortgage lenders for the best interest rate, but there are other factors to consider that may impact your overall expense. Be an educated homebuyer. Here’s what you need to know to help you make an informed decision.
Consider mortgage types. There’s more than one type of home loan available. Your credit history and current financial standing plays a significant role in what kind of loan you’re eligible for. Conventional loans represent a majority of all mortgages and are issued and backed by private lenders. Depending on the size of the loan, a conventional loan may also be sponsored by federal agencies such as Fannie Mae or Freddie Mac. Government-backed loans (FHA, VA, etc.) are designed to help first-time buyers, people with unique financial situations or low credit get approved for a home mortgage. Borrowing requirements for government-backed loans tend to be more lax than conventional loans, with low or zero down payments and flexible income requirements. Then you have fixed and adjustable-rate mortgages. Essentially a fixed-rate mortgage assures a predictable monthly house payment, whereas an adjustable-rate mortgage may change periodically, leaving you paying more monthly. These loans are only recommended if you plan on living in the home for a limited number of years, or plan to pay off the loan early.
Rely on APR. When you get a mortgage to purchase a home, you won’t just be paying interest on that loan. In most cases, there are additional costs and fees attached, such as discount points, broker fees, loan origination fees, mortgage insurance closing costs and other charges you may pay when you get the loan. APR is the annual cost of the loan, expressed as a percentage. You get more information with APR, and knowing the APR allows you to understand what you’ll really be paying, while interest rate only reflects the annual cost of the loan itself, so APR is a better comparison tool than interest rate alone.
Understand points. To arrive at a lower interest rate than their competitors, some lenders may offer discount points, which are paid in fees to the lender. One point is equal to one percent of the principal amount, so on a $250,000 home, one point equals $2,500 that would be paid up front. Pay more points, get a lower rate. Discount points could also add up to a higher APR, but the rate environment plays a big role in whether or not paying points makes sense and could save you money. The Federal Trade Commission recommends homebuyers ask for points to be quoted as a dollar amount, so you’ll know exactly how much you will have to pay.
Get details on associated fees. Loan origination or underwriting fees, broker fees, closing costs — these numbers all add up in the total cost of your loan. Some are paid at the time of application, while other fees are included in closing costs. Be sure to ask your lender to outline exactly what fees you will pay, what each fee includes and get an explanation on anything you don’t understand.
Factor in PMI. Private mortgage insurance is required on any mortgage where the homebuyer makes a down payment of less than 20%. PMI is the price many homeowners pay when they don’t have a huge amount saved for a down payment, or may have poor credit history. Know whether you’ll have to pay PMI on your loan, get the total cost of your mortgage insurance and find out what your total monthly payment will be with PMI included.
Negotiate the best deal. The cost of a home mortgage typically varies from one lender to the next. Request a breakdown of each cost associated with your loan. It never hurts to ask your lender if one or more fees could be reduced to help save you money or if they’re able to provide better terms than you’ve found elsewhere. Once you’ve settled on a lender, obtain a written lock-in form to guarantee the rate you agreed upon. (Lock-in fees may apply, but may be refunded at closing.)
If you’re in the market for a new home, comparing costs and terms between lenders may save you money in the long run. Most importantly, choose a lender who is 100% transparent with you regarding any fees associated with your mortgage loan so there won’t be any surprises.
Are you ready to start the process? Contact us today to speak with a loan expert near you.