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Buying a home is one of the most important financial decisions you will make in your life. And choosing the right mortgage is one of the most important parts of the home buying process.
Mortgages come in all shapes and sizes, and interest rates can vary widely from lender to lender. The interest rate represents the cost of borrowing money – and even a small difference in the rate can amount to a sharp difference in your total spending.
For example, if you take out a 30-year fixed rate mortgage with a 3% interest rate, your monthly payment will be $ 843 and you will pay $ 103,555 in interest over the life of the loan. But that same loan with an interest rate of 5% will cost you $ 1,074 per month and $ 186,512 in interest.
Just a 2% difference in your interest rate equals almost $ 83,000 in additional interest payments over the life of the loan.
So, when shopping for a mortgage, you need to be sure that you are getting the best mortgage rate. Here are nine tips to help you do this and save money on your mortgage in other ways.
1. Use a mortgage calculator.
Mortgages are complex and even small changes in their terms can have a significant impact on your overall spending. A good first step to understanding your future mortgage is try mortgage calculator… A good mortgage calculator available online will allow you to adjust the mortgage interest rate and terms and see how it affects your monthly payment and overall expenses. It can also help you understand how much you can afford.
You can compare mortgage rates from multiple lenders through Credible.
2. Improve your credit score.
Your credit rating plays an important role in determining the mortgage rate that will be offered to you. Lenders view credit ratings as representative of how likely it is that you will repay the loan. The higher your score, the better interest rate you will probably get.
Many lenders also have a minimum credit ratings apply for a regular mortgage. You will need a minimum of 620 points for most regular mortgages and 580 points or higher to get the minimum down payment on an FHA loan.
However, the best mortgage rates go to people with a credit rating of mid-700 and above. If your score is below this, you may want to consider improving your score before applying for a mortgage.
Request copies of your credit report from three major credit bureaus using a website such as AnnualCreditReport.com (you need a free copy every year). Review them to see if there are any errors that you should dispute. Make a commitment to pay all your bills on time, pay off your debts, and stay well below the credit limit on your credit cards.
3. Reduce your debt-to-income ratio.
The Debt To Income Ratio (DTI) is a key metric that lenders use when evaluating mortgage applications. The DTI measures all of your monthly commitments versus how much money you make. Lenders are reviewing the DTI to see if you can handle your monthly mortgage payment.
Higher debt-to-income ratio could mean you are more likely to face 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 those from Fannie Mae.
Paying off your debt can increase the likelihood that you qualify for a mortgage and receive a higher rate. Consider spending some time reducing your credit card balances or paying off your loans before applying for a mortgage.
4. Explore home buying assistance programs.
Numerous state and federal programs can help you afford a home, especially if you are 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 ratings qualify for mortgages with a low down payment.
- VA loans. Eligible Service Members and Veterans can qualify for a zero down payment mortgage.
- USDA loans. Rural residents can apply for a fixed rate, low cost mortgage loan with a zero down payment.
- Home ownership vouchers. They are available to qualified low-income people who need help buying a home.
States often have more robust first-time homebuyer programs, which may include assistance with a down payment. Contact your state housing finance agency or your local HUD office for more information on these programs. Your lender can also help you find them.
5. Make a down payment of at least 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 for real estate, you need to purchase private mortgage insurance.
Private mortgage insurance, commonly called PMI, protects your lender if you cannot make your mortgage payments. Typically, you will pay a monthly PMI premium as part of your recurring mortgage payment until you are eligible to opt out of insurance.
PMI monthly premiums range from $ 30- $ 70 for every $ 100,000 you borrow, according to Freddie Mac… So, if you want to buy a house for $ 250,000, invest 10% ($ 25,000), and fund the remainder ($ 225,000), your monthly PMI payment will be at least $ 60, but could end up in excess of $ 140.
Since PMI is an additional cost, saving up to 20% on your down payment can help you save money down the road.
6. Choose a shorter loan term.
A 30 year mortgage may be the most common, but you have several options when it comes to the length of your mortgage. Mortgage lenders usually offer mortgages for 10, 15 or 20 years.
The shorter the term of the mortgage, the higher the monthly payment will be. But you will also get lower mortgage rates and pay significantly less interest over the life of the loan. If you can afford the higher monthly payment, you will save a lot of money in the long run with shorter time frames.
Credible makes it easy compare mortgage rates for different periods from several creditors.
7. Choose the type of mortgage that suits you best.
Different mortgage products are better suited for people with different financial situations. Here are the most common types of mortgage loans:
- Conventional loans. This category of loans includes mortgage loans that are not part of any specific government program. In most cases, these are known as “qualifying” loans and comply with the rules set by the Federal Housing Finance Agency. These loans are generally best suited for people with good credit history looking for low mortgage rates.
- Giant loans. These loans exceed the limits set for the respective loans ($ 548,250 in 2021). Large loans can be as high as $ 1 million or more.
- FHA loans. These mortgages come from private lenders but are insured by the federal government, allowing people who would not otherwise be eligible for a mortgage to buy a home. They can be a great option for people who are not eligible for a regular loan, but can be more expensive in the long run.
- VA loans. These mortgages are a benefit that the Department of Veterans Affairs provides to military personnel and veterans. Eligible borrowers can buy a home without a down payment.
- USDA loans. These USDA programs either provide loans directly to the rural poor or provide loan insurance from private lenders. They offer no prepayment loans to people who qualify.
8. Consider prepaying the percentage point reduction.
When you pay points at the close of your mortgage, you are, in effect, paying a commission in exchange for a lower interest rate. Your lender may also refer to them as discount points. mortgage points, or prepaid interest.
One point is usually 1% of the loan amount. The amount by which each pip lowers your interest rate depends on the lender.
Paying out points makes the most sense if you know you will be at home for a longer period of time. The lower interest rate and lower monthly payment take time to recoup the money you paid upfront for points.
9. Buy rates
It is good practice to compare at least five different credit ratings to find the best rate. According to the authors, this can save you $ 3,000 on average. Freddie Mac…
Using services such as Credible can simplify pricing. You just need to fill in your information once and then you can check rates with multiple lenders…
When evaluating various loan offers, pay attention not only to mortgage rates. Also look out for commissions, closing costs, and other fees that can affect the total amount you pay.
Since buying a home and getting a mortgage come with a lot of costs, it’s also a good idea to compare the annual interest rates from different lenders. The annual interest rate includes the interest rate and all other mortgage costs, so it can better represent the total cost of the loan.