If you are planning to buy a house on a mortgage, chances are you only have a little to waste and are looking for the best deal for your money. While everybody wants the best rates, only a few people get them. This is because of a variety of factors besides obvious ones like the location of the house or its architecture.
Other factors that come into play include your credit score, your lender’s terms and even your ability to negotiate. This is why it is crucial to make all the necessary preparations and conduct proper research before entering the market.
This article outlines some of these factors and provides practical tips to help you land the best mortgage deal for your next home. Read on for more!
Your credit score
As way too many people come to realize a little too late, your credit score is extremely important. It can easily decide important parts of your life, like the house you live in and the lifestyle you maintain.
A credit score tells financiers and lenders how well you manage debt and gives them an estimation of how easy it will be to pay them back if they offer to lend to you. It is calculated based on several factors, including your borrowing history: How much debt have you had in total? How much of it have you paid back as per the agreed terms? How long did it take you to pay back? How much did you borrow? Etc.
A good credit score automatically builds a good perceived reputation, and they are likely to lend you money on more favorable terms. You may get more amounts with low interest, access to various types of financing, extended repayment time and other benefits.
To keep a good credit score, adopt good habits such as borrowing only what you know you can repay and avoiding taking out too much credit.
Make a big down payment.
Making a large down payment on your mortgage can help you land a better deal in several ways. First, it can help you qualify for a lower interest rate, as lenders see a larger down payment as a sign of financial stability and a lower risk of default. This can result in significant savings over the duration of your mortgage.
In addition, a larger down payment can help you avoid paying private mortgage insurance (PMI), an insurance policy required by lenders when the borrower puts down less than 20% of the home’s purchase price. PMI can add hundreds of dollars to your monthly mortgage payments, so eliminating the need for it can be a significant financial benefit.
Finally, a larger down payment can give you more bargaining power when negotiating with sellers and make you a more competitive buyer in a competitive market.
To save for a larger down payment, consider setting up a budget, cutting unnecessary expenses, and increasing your income through side hustles or asking for a raise at work. It may take some time and effort, but the long-term financial benefits of a larger down payment can be well worth it.
Shop around for the best mortgage rate.
One of the most effective ways to land a good mortgage deal is to shop around and compare rates from multiple lenders. Different lenders will offer different rates and terms, so it’s important to explore all your options to find the best deal for you.
You can start by getting quotes from various lenders, including banks, credit unions, and online mortgage lenders. Feel free to negotiate and ask for a lower rate or better terms. Remember, the lender wants your business, so they may be willing to work with you to get it.
Consider working with a mortgage broker who can help you shop around and compare rates from different lenders. A good one can also help you understand the various mortgage products and terms available and find a mortgage that meets your needs and budget.
Consider a shorter loan term.
While a 30-year mortgage is the most common loan term, shorter loan terms such as 15- or 20-year mortgages can also be a good option for some borrowers. These shorter loans often come with lower interest rates, which can result in significant savings over the duration of the loan.
However, it’s important to carefully consider whether a shorter loan term is right for you. While the lower interest rates can be attractive, they also come with higher monthly payments, which may only be feasible for some. It’s a good idea to review your budget and financial goals before deciding on a loan term that’s right for you.
Keep an eye on mortgage rates.
Mortgage rates can fluctuate over time, and it’s important to stay current to ensure you’re getting the best deal. Keep an eye on mortgage rates through online mortgage comparison tools, financial news outlets, and your lender. If you see rates significantly lower than what you’re currently paying, consider refinancing to take advantage of the lower rates.
Shop around for lenders.
It’s important to shop around and compare mortgage terms and rates from various lenders. Don’t just go with the first lender you come across, or your real estate agent recommends. Take the time to research and compare offers from various sources, including banks, credit unions, and online lenders.
When shopping around for a mortgage, be sure to ask about the lender’s rates and fees and any additional costs associated with the loan. These could include origination fees, points, closing costs, and more. Ensure you understand all the costs involved and how they will impact your mortgage payments.
It’s also a good idea to ask about discounts or special programs available, such as first-time homebuyer programs or programs for military members or veterans.
How to choose a good mortgage lender
Check their reputation: Research the lender’s reputation and track record. Check online reviews, ask for references, and look for any red flags, such as high customer complaints. You can also check with the Better Business Bureau or your state’s regulatory agency to see if there are any negative reports or lawsuits against the lender.
Understand their fees and terms: Make sure you fully understand the lender’s fees and terms, including the interest rate, closing costs, and any additional fees associated with the loan. Avoid lenders that charge high fees or have unclear terms.
Consider customer service: Good customer service is important, as you’ll work closely with your lender throughout the mortgage process. Look for lenders that have a reputation for being responsive and helpful.
Seek pre-approval: Consider getting pre-approved for a mortgage before shopping for a home. Pre-approval involves applying to a lender, who will review your financial information and credit history to determine how much they are willing to lend you. Pre-approval provides an idea of how much you can afford to borrow and make you a more competitive buyer in a competitive market.
Get pre-approved.
Getting pre-approved for a mortgage can help you land a better deal by showing people that are selling their property that you are a qualified buyer. Pre-approval involves applying to a lender, who will review your financial information and credit history to determine how much they are willing to lend you.
With pre-approval, you’ll have a better idea of how much you can afford to borrow, which can help you narrow your search and focus on properties within your budget. It can also give you an edge over other buyers who may not be pre-approved, as sellers may be more likely to consider an offer from a pre-approved buyer.
Negotiate.
Once you’ve found a lender and a property you’re interested in, don’t hesitate to negotiate. You can negotiate on various issues, including the interest rate, closing costs, and even the loan term length.
You may have more bargaining power if you have a strong credit score and a large down payment. Be sure to research and know what a fair rate and terms are so you can negotiate effectively.
Consider working with a mortgage broker or loan officer who can help you negotiate the best deal possible. They can leverage their relationships with lenders to get you a better rate or terms.
Consider a fixed-rate vs adjustable-rate mortgage.
A fixed-rate mortgage is where the interest rate remains the same for the entire loan term, typically 15 or 30 years. This can be a good option for borrowers who want the stability of a fixed payment and are planning to stay in their homes for the long term.
Fixed-rate mortgages often come with higher interest rates than adjustable-rate mortgages (ARMs), but the trade-off is that the payment remains the same over the life of the loan. This can make it easier to budget and plan for the future, as you don’t have to worry about fluctuating interest rates affecting your payments.
An adjustable-rate mortgage (ARM) is a type where the interest rate can change over time. The initial interest rate is usually lower than a fixed-rate mortgage, but it can increase or decrease based on market conditions.
ARMs typically have a fixed rate for an initial period, such as 3, 5, or 7 years, after which the rate will adjust based on an index, such as the London Interbank Offered Rate (LIBOR) or the U.S. Prime Rate. The rate can change every year, or every month, depending on the loan’s terms.
ARMs can be a good option for borrowers who expect to sell their home or refinance before the adjustable period begins, as they may be able to take advantage of the lower initial rate. However, it’s important to know that the interest rate can increase over time, significantly impacting your monthly payments.
Choose a shorter loan term.
Choosing a shorter loan term, such as a 15-year mortgage instead of a 30-year mortgage, can help you land a better deal on your mortgage. While the monthly payments on a shorter loan term may be higher, you’ll pay less in interest over the life of the loan.
In addition, a shorter loan term can help you build equity in your home faster, as you’ll be paying off the principal balance more quickly. This can be a good option for financially stable borrowers who want to pay off their mortgage as quickly as possible.
Refinance your mortgage.
If you’ve already purchased a home and are looking to land a better deal on your mortgage, you may want to check out the option to refinance. It generally involves getting a new mortgage to settle your existing mortgage, typically at a lower interest rate or with different terms.
Refinancing can be a good option if you’ve improved your credit score, building your home’s equity, or if interest rates have significantly dropped since you took out your original mortgage. It’s important to consider the costs and benefits of refinancing before deciding, as there may be fees associated with the process.
What to avoid when choosing a mortgage deal
- Avoid signing up for a mortgage with a high-interest rate, as this can significantly increase your monthly payments and the overall cost of your loan.
- Avoid signing up for a mortgage with prepayment penalties, as this can make it difficult to refinance or sell your home.
- Avoid signing up for a mortgage with a long lock-in period, as this can limit your ability to take advantage of lower interest rates if they become available before your mortgage closes.
- Avoid signing up for a mortgage with a high origination fee, as this can significantly add to your loan’s overall cost.
- Avoid signing up for a mortgage with a high closing cost, as this can also significantly add to your loan’s overall cost.
- Avoid signing up for a mortgage with an extremely high down payment requirement, as this can strain your finances and make it more difficult to afford your monthly payments.
- Avoid signing up for a mortgage with a high debt-to-income ratio, as this can make it more difficult to qualify for a loan and may result in a higher interest rate.
- Only sign up for a mortgage after fully understanding the terms and conditions of the loan, as this can result in unexpected fees that can increase the overall cost of your loan.
Overall, landing a good mortgage deal takes time and effort, but the benefits can be well worth it in the long run. By considering your credit score, making a large down payment, shopping around for the best mortgage rate, considering a shorter loan term, and keeping an eye on mortgage rates, you can increase your chances of getting a great mortgage deal for your next home.To start saving up for your down payment, check out CrazyMoneyFacts.com for some helpful tips and tricks!