How to Get the Best Mortgage
So, you’ve found a house you want to buy. Now you need to get the financing. To make sure you get the best deal for the biggest financial transaction of your life, consider the following.
Shop Around – Get offers from several banks. Fortunately, sites like lendingtree.com and bankrate.com make it easy to see what lenders in your area are offering. But don’t stop there. If you’ve been a good customer with your bank – you haven’t had loads of bounced checks, haven’t been late on payments, have direct deposit, and have been with them a while – ask if they’d like even more of your business by beating the best rates you’ve found online. Check local credit unions, too – typically they offer even more favorable loan terms.
Credit Check – Lenders are going to check your credit, so you might as well see what they’ll be looking at. You can get or estimate your FICO score online, and the Federal Trade Commission’s official site, annualcreditreport.com, allows you to get a free credit report. If there are any errors on your credit report, file a dispute with the reporting agencies to fix it.
Can You Afford It? – Figure out what the payment will be on your prospective loan, and add that to all of your other monthly payments for car, credit cards, etc. This is your debt-to-income ratio, and it’s one of the ways lenders decide whether you qualify for a loan, and for how much. If your ratio is about 30 to 40 percent, you’ll probably qualify. But if the prospective mortgage puts your ratio above 40, this can be dangerous. Reconsider the amount you’re trying to borrow.
Points – You’ll hear this term a lot. A point is 1 percent of the loan amount. If you’re borrowing $50,000, for example, one point is $500. A lender may offer you the opportunity to buy points (also called discount points) which lower the fixed interest rate on your loan. This allows him to get a lump sum at closing, rather than wait for you to pay interest. If you’re planning to stay in the house for several years, points are generally worth buying.
Go fixed – A typical home loan is a 30-year, fixed percentage rate loan. If you can afford it, you might be able to go with a 15-year fixed loan, instead. Banks offer ARMs, or adjustable-rate mortgages, too. This allows the lender to tie your interest rate to an economic index, possibly changing your interest rate every year. Be very careful if you’re considering an ARM; with interest rates at historic lows, that adjustable rate is sure to go up, and you may find yourself with a payment you can’t make. There are some instances in which an ARM can make sense, but the typical home buyer is better off with the stability of a fixed rate.
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