One of the most important steps in the homebuying process is getting a loan, so you can afford the home with just a down payment. That said, the terms and interest rate of your loan can make a major impact on your long-term finances; for example, a loan of $100,000 at 4.0 percent interest over the course of 30 years will cost you nearly $172,000 in interest. By contrast, a slightly lower rate of 3.5 percent interest over 15 years will only cost you $129,000, a net savings of $43,000 over the term of the loans.
You may not realize how much choice and power you have over your mortgage. Sometimes, shopping around can introduce you to a much better deal—if you know where to look.
What to Look For
First, let’s define what makes one loan “better” than another:
- Interest rates. The obvious variable to consider is your annual percentage rate (APR). As you saw from our example in the introduction, even a half a percentage point decrease in your interest rate can save you tens of thousands of dollars over the long term. That said, interest rates tend to be very similar across the industry; it’s rare to see two different banks offering radically different interest rates to the same consumer.
- Repayment terms. You’ll also need to consider the repayment terms. Namely, will you be paying a “fixed rate,” which will remain the same over the lifetime of the loan, or a variable rate, which can and will change as economic conditions vary? For most consumers, a fixed rate mortgage is superior.
- Loan length. The most popular mortgages are 15-year and 30-year. Shorter mortgages have you paying less interest, but much higher monthly payments. It may or may not be worth the tradeoff for your circumstances.
- Depending on your finances, you may be required to pay for private mortgage insurance (PMI), which would result in even higher monthly mortgage payments. If possible, strive for a loan without PMI.
Improving Your Position
One of the easiest ways to get a “better” home loan is to improve your current financial position, in one or more of these ways:
- Credit score. For most banks, the most important variable in determining which loans are available to you is your credit score. Because your credit score is seen as a reflection of your financial trustworthiness, banks are typically more likely to extend a lower interest rate for loans for people with higher credit scores. You can spend time increasing your credit score long before you start looking for home loans, especially if your credit score is currently in poor shape. Don’t open new lines of credit, work on paying down your debts, and make payments on time.
- Standing debt. It’s also helpful to reduce your standing debt. Not only will this put you in a better financial position overall (reducing the potential impact of your mortgage), it will also lower your credit score. It could also aid banks in their determinations of your current financial standing, potentially scoring you better mortgage terms.
- Down payment potential. PMI usually applies only to loans for people with low down payments. If you’re able to secure a down payment of 20 percent (or more) of the value of the home, you likely won’t be responsible for paying PMI. It may take you longer to save up a down payment of 20 percent, but you’ll have a lower monthly payment as a result of your efforts.
- Loan amount. Finally, think about the amount of money you want to borrow. It may seem obvious, but the lower your principal is, the lower your monthly payments are going to be, and the less interest you’ll pay over the term of the loan. You can borrow less by offering more of a down payment, or by looking at properties in a less expensive area.
Note that many of these strategies take a long time to develop, sometimes months or even years. Accordingly, if you want to secure the best possible financial position before buying a home, you’ll need to think and plan with a long-term time horizon in mind.
Where to Look
Once you have yourself in a better financial position, you can start looking for mortgage rates at several different types of institutions:
- Credit unions. Credit unions are member-owned, so they usually offer favorable rates to current shareholders. Some credit unions are strict about membership, but you should be able to find one that works for you.
- Mortgage bankers. Mortgage bankers are employees who work for a major financial institution. Their job is to package loans for underwriters to consider.
- Local correspondent lenders. You may also consider correspondent lenders, who serve as a kind of middle man between you and bigger banks. They often work locally, and can create your loan, but will eventually sell your loan to a major institution.
- Online options. You can shop locally by visiting various financial institutions in your city, but it’s typically much easier to look online. By shopping online, you’ll also open the door to more options—and if you use a good search tool, you can compare loans apples to apples.
It’s also a good idea to talk to a real estate agent; they may have recommendations on where to look for a loan, or advice on how to get the best possible terms.
A Note on Refinancing
If you’re currently unhappy with the state of your mortgage, thanks to a high interest rate, a variable rate, or other factors, you may be able to refinance. Refinancing isn’t the right move for every homeowner, but it could help you lower your monthly payments in some situations.
If you’re currently thinking of buying a new house, or if you’re a property investor who needs help making sense of your financial position, Green Residential may be able to help. Contact us today to get in touch with one of our buying-focused real estate agents and to get advice on the homebuying process.
Michael is Green Residential’s Vice President. He helps to keep the team organized and running smoothly. Prior to joining Green Residential, he spent 12 years working at Cadence Bank in the mortgage loan servicing department, where he specialized in loan audits, modifications, and bankruptcy-related issues for the mortgage portfolio.
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