Shopping for a mortgage and comparing rates is a lot easier now than it used to be. These seven steps will help you find the best available pricing in your area. Every week, I see home purchasers make the same costly mistake: they fail to shop for a mortgage.

When buying a home, finding the appropriate mortgage loan is just as crucial as getting the perfect residence. After all, this is a payment you’ll have to make every month for the rest of your life. For better or worse, the interest rate you lock in and the sort of loan you choose will have an impact on your financial future.

So, what is my suggestion? Consider all of your home loan alternatives before making a decision. Here’s a quick breakdown of seven important things to keep in mind when looking for a mortgage.

THE STAGES OF A MORTGAGE

Pre-Qualification

Before you go house shopping, you should go shopping for a mortgage and receive a mortgage pre-qualification letter. Simply contact a bank and answer a few questions about your income, assets, obligations, and the type of property you want to buy. A letter from the bank will inform you that you should be able to afford a mortgage up to a particular amount. Prequalification does not guarantee that you will be approved for a loan; it is only an informal and voluntary document that helps soothe sellers’ fears that your bid will be accepted if financing falls through.

Pre-Approval

After you’ve made an offer on a house, you can seek mortgage pre-approval. You’ll need to complete a mortgage application, which will allow the bank to assess your credit and inspect the home you wish to buy. If everything checks out, they’ll offer you a preapproval, which indicates the bank will agree to fund the home if all of the requirements are met, and you’ll be able to move through with the closing.

Closing

This is the time at which everything starts to fall into place. Assuming everything is in line, this is when the mortgage is formalized and you become a landlord. Before you get your hands on the keys, you’ll have to go through a lot of paperwork!

TYPE OF LOAN

The four most common types of institutional mortgage loans are conventional, FHA, VA, and jumbo mortgages. When looking for a mortgage loan, the first step should be to figure out what types of loans you’ll be applying for and which ones will be best for you. Each type of loan has its own set of benefits and drawbacks.

Conventional Loans

These mortgages need a 20% down payment and do not require private mortgage insurance (PMI). A traditional loan is usually the best option if you have enough money in your savings account to cover the down payment and closing costs.

FHA Loans

If you (and the house you’re purchasing) qualify for an FHA loan, you’ll only need a 3.5 percent down payment. This can be highly advantageous for folks who do not have a lot of cash on hand. However, if you put less than 20% down on a home, you’ll be required to pay private mortgage insurance (PMI), which is a monthly charge that acts as insurance in the case of a default.

VA Loans

VA mortgages, which are backed by the Department of Veterans Affairs, require little to no down payment and are only accessible to veterans who meet certain criteria.

Jumbo Loans

You’ll need to use these loans if you need to borrow more than the typical conforming loan limit (in most parts of the United States, $417,000 in 2010). Because of their scale, these loans have unique restrictions and collateral requirements.

REPAYMENT CONDITIONS

When picking between different types of house loans, keep the repayment conditions in mind. You can pick between a fixed interest rate that remains constant during the loan’s term and an adjustable interest rate (ARM) that fluctuates at regular intervals, such as annually.

Fixed Rate

Fixed-rate loans are best for families who want to stay in their home for longer than a few years. Many people choose to repay their mortgages over a 30-year term. You can receive a mortgage for 25, 20, or even 15 years if you can afford larger monthly payments. A shorter-term mortgage loan has the advantage of saving money over time and paying less interest.

Adjustable-Rate

Adjustable interest rate mortgages (ARMs) will save you a lot of money if you only plan on staying in the house for a short time. The interest rate is substantially lower than a fixed-rate mortgage for the first five to seven years, but it will climb to the average interest rate every year after that, which may be much higher. Your mortgage payment could soar if you still own the house, but it’s a risk some purchasers are prepared to take in order to lock in a cheap rate for several years.

INTEREST RATES

Obtaining the best interest rate is a crucial component of obtaining an affordable mortgage.

Look for the most recent mortgage interest rates before contacting mortgage lenders. This way, you’ll know what to expect. You know you have wiggle room if the national average interest rate is about 4.5 percent in the morning and a specific lender provides you 5%. The closer a lender is to the national daily average, the less profit he makes and the better the deal you will receive.

Compare rates on the same loan form from at least four different lenders, either over the phone or online.

POINTS

Inquire with the lenders you’re speaking with about the number of points you’ll need to spend in order to get the interest rate you want. Mortgage points are prepaid interest, which is why they’re often referred to as discount points (as they’re almost like getting a discount up front).

A point is equal to 1% of the total loan amount. To put it another way, the more points you pay up front, the cheaper your loan’s interest rate will be.

Take a $200,000 mortgage with a 3.75 percent interest rate, for example. If you wanted to cut the interest rate to 2.75 percent, you’d buy one point. As a result, you’d have to pay 1% of $200,000, or $2,000, as a penalty. It may seem inconvenient to pay more money up front, but you’ll save a lot of money in interest over the course of the loan, so it’s well worth it.

ANNUAL PERCENTAGE RATE

Isn’t an interest rate the same as an annual percentage rate? Despite the fact that these terms are commonly used interchangeably, the APR is a separate entity.

The annual percentage rate (APR) reflects the total cost of obtaining a loan, which includes points, interest rate, broker fees, and all other costs. The better the deal, the lower the yearly percentage rate. After considering the loan type, interest rate, payback periods, and APR, you should sit down and decide which loan is better.

GETTING A GOOD DEAL

Request that the lender lock in the interest rate and provide you with a written contract detailing the interest rate you locked in, the amount of points you must pay, and the length of time the interest rate will be locked in until the deal expires, or until you find a mortgage loan that you want and obtain pre approval for.

Even if interest rates rise within the time frame you were promised, when you lock in an interest rate, you will always be able to receive a home loan at the lower rate you locked in. The only drawback is that if you lock in a rate of 5% then prices drop to 4.5 percent the following week, you’ll be stuck with the higher rate if you need to borrow from the lender. If you’re serious about purchasing a home sooner rather than later, it’s usually a smart idea to lock in an interest rate.

Summary: Shopping For A Mortgage – Things To Know

Comparing mortgage rates is a lot easier now than it used to be. These seven steps will help you find the best available pricing in your area. Every week, I see home purchasers make the same costly mistake: they fail to shop for a mortgage.

So, what is my suggestion? Consider all of your home loan alternatives before making a decision.

If you have any questions about Shopping For A Mortgage – Things To Know contact me today.