by Jamie Gold
4/27/2006 Choosing the right house or an apartment to buy must have been a challenge, but that’s not the end. Now, you’ve got to get a mortgage, which is a story of its own. It takes lots of time, paperwork, and money.
Whether you are the fist time home buyer (mortgage taker) or this is just one time of many, we have strategic advice for you and we are sure you can learn something new about how to get the right mortgage plan and the lowest interest rate possible. No, it’s not written in stone, it’s not black and white; you have to apply advice to your specific situation.
When you apply for a mortgage loan, lenders look for consistency in your employment history and credit history. This will affect the rate of mortgage you will receive. Ideally, lenders want to make sure that the borrower stayed in the same industry for at least two consecutive years. This shows the capability to earn stable income to be able to make future mortgage payments. Credit card payments should be consistent and on time, and total liability should not exceed 42% of monthly income. This shows if you have sufficient assets and cash for a minimum of two months’ mortgage payments. If your employment and/or credit history is less than perfect, you might want to wait for a better time to get a better possible mortgage rate.
Choosing the mortgage plan is one of the most important decisions in this process. There are several options to consider:
Fixed Rate Loan – interest rate is set for the full amount of the loan, so that a monthly payment will also be the same. It’s predictable and stable; and you are not taking any risks. This choice is generally advised for people who are planning to stay in their house for many years – be that 20-30. Also, keep in mind that mortgage interest rates are going up and predicted to continue going up.
Adjustable Rate Loan – starts with a lower initial interest rate than traditional fixed rate loans, however, the interest rate may change periodically based on market conditions, after a set initial payment period (be that 1-3-5 years). As the mortgage rate changes, your monthly mortgage payment changes, so there is risk involved. If you are planning on staying in this home for a short period of time, this might be the best option for you.
First time home buyer? Most banks offer affordable mortgage loans for first-time home buyers with limited savings. Also, FHA and VA government loans require little or no money down.
If you got promised a low mortgage rate already, don’t get too happy yet. Delays in the process are very common and might be due to builder’s, title company’s, bank’s, or even your own fault. So, make sure that there is more than enough time to close on your loan. If you got a “lock-in” mortgage rate, make sure to get it in writing with the expiration date. Otherwise, when the time comes to close, the mortgage rate might no longer be available.
You need to know that in addition to down payment, you will be required to pay taxes, closing costs, and miscellaneous fees such as inspection, notary, document preparation, etc. There might also be some “hidden” costs. Make sure to get the Good Faith Estimate with the breakdown of all costs. And, don’t be afraid to ask for explanations if you are not understanding what exactly you are being charged for. Generally, closing costs are 2-6 percent of your total mortgage, depending on where you live, the loan you choose, and a closing date.
Other ways to get a lower interest rate on your mortgage:
Down payment: A larger down-payment will give you a better rate. Also, a 20% or above down payment will eliminate the necessity of PMI (Private Mortgage Insurance), which would have been an additional monthly expense.
Points: If you have extra cash and want to lower your mortgage payments (cut interest rate), you can buy “down” points. One point equals 1% of the loan amount.
Loan period: By decreasing loan period (ex. Choosing 15 year fixed mortgage over the 30 year fixed mortgage), you are also getting a lower interest rate. However, the monthly payments will be higher for a 15 year fixed mortgage than for a 30 year fixed mortgage.
Decisions about buying a home are some of the most important decisions of your life. Get educated and make right individual choices. Good Luck!
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