How to get the best mortgage rate
Buying a home is an adventure. First you understand how much house you can afford. Later comes the mortgage. Knowing how to get the best mortgage rate starts with knowing the answers to these six questions.
1. Get a fixed rate or an ARM?
Mortgages have fixed interest rates or adjustable rates. Fixed rate mortgages Lock yourself into a constant interest rate that you will pay over the life of the loan. The principal plus interest portion of your mortgage payment remains constant throughout the life of the loan, although insurance, property taxes and other costs can fluctuate.
The interest rate on a variable rate mortgage may change over time. An ARM typically begins with an introductory period of 10, seven, five, or three years (or even one year), during which your interest rate holds. After that, the rate may change periodically.
ARMs generally offer lower introductory prices. But your ARM rate may increase after the introductory period ends, causing monthly mortgage payments to increase – substantially, in some cases.
2. Do I have to pay points?
Discount points are the fees that borrowers pay to reduce the interest rate on their mortgages. One point is 1% of the loan amount, which typically reduces the mortgage rate by 0.25%, although the reduction can vary. If you take out a loan at an interest rate of 4.5%, you may be able to pay a fee of $ 2,000 to reduce the rate to 4.25%.
When you pay for discount points, you usually pay thousands of dollars up front to save a few dollars each month. It takes several years for the monthly savings to add up where they exceed the original amount paid. This break-even period varies depending on the loan amount, the cost of points and the interest rate. It is often seven to nine years old. If you don’t plan on having the loan for that long, it’s a good idea to skip the discount points.
3. What are the closing costs?
Closing costs are fees charged by the lender and third parties. Closing costs do not affect the mortgage rate (unless you pay discount points). But they do have an impact on your wallet. Closing costs are typically around 3% of the purchase price of your home and are paid at the time you close or complete the purchase. Closing costs include various costs, including underwriting and processing costs of the lender, as well as title insurance and valuation costs, among others.
You are allowed to shop for lower fees in some cases, and the loan estimate form will tell you what services you can purchase to reduce closing costs.
4. Are there first-time home buying programs?
Before paying for a mortgage, find out if you qualify for special programs that lower the cost of buying a home. Many states offer assistance for first time buyers as well as regular buyers.
Each state offers its own mix of homebuyer programs. Many states offer down payment assistance, often combined with favorable interest rates and tax breaks. Some programs are geographically targeted and others offer assistance to homebuyers in certain professions, such as teachers, first responders, and veterans.
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5. Size of the deposit?
Veterans and rural borrowers may be eligible for loans that provide 100% financing without any down payment. Other borrowers may be eligible for mortgages that allow down payments as low as 3% or 3.5%. Here is a summary:
VA loans: If you (or your spouse) are an active military or veteran, you may be eligible for a mortgage guaranteed by the Department of Veterans Affairs.
USDA loans: If you live in a rural area, the Department of Agriculture can guarantee a low-down or no-down mortgage and help cover closing costs.
FHA loans: Mortgages insured by the Federal Housing Administration allow down payments as low as 3.5%. FHA insured loans are more forgiving of low credit scores, but you pay mortgage insurance for the life of the loan.
Conventional loans with 3% down payment: Some borrowers are eligible for conventional loans, which are not government insured, which allow down payments as low as 3%. Mortgages are generally intended for first-time borrowers or low to moderate income borrowers. These loans charge private mortgage insurance, or PMI, which can be canceled after you have 20% or more equity.
6. How to compare?
Here are some tips for comparing loan offers:
Buy loans within a set period of time. The big three credit bureaus encourage you to shop around. You have 14 to 45 days, depending on the scoring model, to apply for as many mortgages as you want with the same effect on your credit scores as a loan request.
Compare closing costs using loan estimates. Each lender is required to provide a Loan estimate form with details of the terms and fees of each loan. The loan estimate is designed to simplify the task of comparing mortgage offers.