One of the largest financial transactions most people will make in their life is securing a home mortgage. Smart consumers can use a few suggestions, in order to make sure they acquire an affordable mortgage.
Credit Reports
The first thing you should do is order your credit reports. A low credit score can cause you to have a higher interest rate on your mortgage. There are 3 major credit reporting companies and you should order copies from each of them. Review each credit report and make sure there are no discrepancies in your credit history.
You are entitled to a free copy of your credit report once a year from the three major credit reporting companies. A federal law called the Fair Credit Reporting Act requires the credit reporting companies to provide them. The three major credit reporting companies are Equifax, Experian, and Transunion. By going to www.annualcreditreport.com you can order your credit reports for free.
After reviewing your credit history, if you find any errors, you can contact the credit reporting bureau to report these errors. These negative items can be removed from your credit report by requesting that the business or lender prove the negative item. Also, if you can disprove the negative item, you can request that the item be removed from your report.
Credit Score
You can get your FICO credit score from any of the three credit reporting companies. This score will help you estimate the interest rate you will qualify for. Make sure to get your FICO score and not any other type of score, they are not the same thing. The lenders use the FICO score when you apply for a loan.
FICO scores are typically not free. You normally have to pay for it. Some credit cards give you a free FICO score. Check with each of your credit cards to see if they can provide it for free.
A FICO score of 760 or greater will get you the best interest rates from lenders. A score from 700 to 759 will pay around 2/10 of a percentage point more. For every 20 points your score decreases from there, your interest rate will go up incrementally.
Any changes in your credit score can move your interest rate up and down. By lowering your total debt and removing any errors on your credit reports, you can expect a lower interest rate. If you
plan on applying for a mortgage anytime soon you will want to avoid applying for any new loans or credit cards.
Mortgage Shopping
Don’t go with the first lender you look at. Try looking at multiple lenders as their rates can differ from lender to lender. There are a number of institutions that provide mortgages. You can acquire a mortgage from online lenders, credit unions, banks, brokers, non bank lenders and others. Each of these can have their positives and negatives and you won’t be able to determine which one is right for you until after reviewing them all.
It is a good idea to get quotes from at least 5 different lenders before deciding which one is right for you. These quotes will provide you with a clear idea of what the rates are based on your credit score. You will also see the fees that each of these lenders will charge.
Interest Rates
Low interest rates shouldn’t be your main focus. There can be hidden fees that can make the lower interest rate loan actually higher than a higher interest rate loan. Lenders know that lower interest rates can attract more borrowers so they will hide fees to increase their profit.
Closing costs come with all mortgages and are typically 2 to 5 percent of the loan amount. If a lender advertises a mortgage with no closing costs then they are usually charging a higher rate to cover those costs. Inversely, lenders will offer a lower interest rate but have higher closing costs.
The APR, or Annual Percentage Rate, can help you understand the actual cost of your mortgage. The APR shows the total cost of the loan as an interest rate, so the lower the APR the lower the cost of the loan and the higher the APR the higher the cost of the loan. The APR isn’t completely accurate but is still a good tool for comparing lenders.
Down Payment
Saving for a down payment can be the most difficult part of getting a mortgage. Saving for a down payment can involve lowering your expenses and increasing your earnings. Having a large down payment can help you save money on your mortgage.
The size of your down payment can affect your interest rate the same way your credit score can. If you put 5% down then your interest rate will most likely be higher than if you put 10 or even 20 percent down.
Mortgage insurance is required for any borrowers who put under 20 percent down on their mortgage. Mortgage insurance can cost anywhere from .4 to 1.3 percent annually of your loan amount. Your mortgage insurance rate will vary based on how much you put down so the rates will be lower if your down payment is closer to the 20% down.
You can put as little down as 3.5% on an FHA loan but the fees for mortgage insurance will typically be higher than other loans. Saving for a higher down payment will typically help you save money on your mortgage.
Points
You can pay a percentage of your loan to purchase points on your mortgage. You can lower your interest rate from ¼ to ⅛ of a percent by paying 1% of your total loan amount. By purchasing these points you can lower your interest rate.
Adjustable Rate Mortgages
Most borrowers are told to steer clear of adjustable rate mortgages (ARMs), but they may be the right type of loan for specific buyers. If you are not planning on living in your home for a long time then this might be the right type of loan for you.
ARMs provide an initial rate that are lower than a comparable 30 year fixed-rate mortgage. This rate can adjust based on the current market. 5 or 10 years down the line you may be paying significantly higher payment, but if you don’t plan on staying in the home for that long then an ARM might be the right loan for you.
Ready to find an affordable mortgage (new or refi)?