The word mortgage is no doubt a scary one. Shopping for mortgages, however, is probabaly the wisest thing that you could be doing to secure a better financial future for yourself. Yes, I agree, it takes lots of time and energy.
But in this case, it is really a no pain no gain situation. In the long run, it can save you thousands of dollars. In this article, we will share some of the best mortgage shopping tips that you may not have heard before. As a general rule of thumb, it is important to make it your goal to compare loan offers from at least 3 different lenders as a way of how to compare mortgages.
Your mortgage is probably the single biggest purchase you will ever make. Most mortgages are with you for 30 years. The amount of interest you pay over the life of the mortgage usually doubles or triples the cost of the property you originally bought.
Saving money on your mortgage may be something you didn’t think was possible. There are things you can do both before you apply for a mortgage and after you get one. Following these tips might just save you thousands or even tens of thousands of dollars over the course of the mortgage.
Pre-approvals are important
Try to get at least three pre-approvals if you can. Luckily, the internet and newspapers are easy places that you can look. They have a wide variety of information you can often reference. They will provide a good baseline for you to start your search.
From here, you can go ahead and start to contact banks, credit unions, brokers and lenders as needed. This way, you are familiar with the market and can iterate as needed. Having your research done in the beginning will help you tremendously.
When you to here, it is important to ask from at least three different pre-approvals. These are the mortgage shopping tips that no one tells you. This is a process in which the lender looks at your finances and will essentially give you an estimate and a potential interest rate. This again allows you to do research and try out specific lenders and see the prices that are out there. This is basically an evaluation in which the borrower is given a summary of what they thin you will likely pay.
This will not really impact your credit score. This doesn’t set anything into stone – it is part of the research phase and you can go back to the best one when you are actually looking for offers.
How to Compare Mortgages
Things to be looking for:
A big question people have is deciding between longer and shorter loans. In general, remember that the longer that it takes for you to pay back your loan means the lower the monthly payments will be. This is because in general, you will pay more during the life of the loan. This is because the interest rates will add up.
Here are the two basic types of loans options:
- 30 year loans – this is a common option because of the lower monthly payments
- 15 year loans – obviously, loan payments are higher but your entire loan is paid off in 15 years which is exciting (despite aggressive prices).
In certain, not so common cases, it is possible for you to get other lengths (even some longer than 30 years).
Loan structure is also something that might heavily impact your decision. For example, it is really common to have a fixed rate mortgage. This is because there is less variation. In a adjustable rate, you might start paying lower but it might end up being high as things in the national economy change, which might prove risky in the long run.
Here are brief descriptions:
Fixed-rate mortgage: the interest rate doesn’t change for the duration of the loan.
Adjustable rate mortgage: in this option, the interest rate is fixed for the first years of the loan. However, when the period expiries, you are subject to rates of the market. This almost always means that your payment amount changes. This is definitely a better option for more advanced borrowers, or people who have a higher monthly income. Make sure you are checking exactly the loan terms in the agreement that was provided by the lender.
13 Ways to Save Money on Your Mortgage
1. Keep Your Credit Score High
One of the top five common reasons people are denied a mortgage is because of a poor credit score. Most people realize that a good credit score will help you secure a mortgage but what you may not know is that is your score is high; it may get you a lower-costing mortgage. People with scores of 740 or higher often pay fewer points, a lower interest rate or both.
2. Shop Around for a Low-Interest Rate
Not every bank or mortgage company offers the same mortgage or the same interest rates. Just as you would shop for the best price on a car, a computer or anything else, you need to shop for your interest rate and yes, it makes a difference. Don’t forget to compare the other costs associated with the mortgage like banks fees, closing points, and title and survey charges.
3. Consider a 15 or 20 Year Mortgage
When you apply for your mortgage, take to the lender about alternatives in the length of the mortgage. If you can handle a higher monthly payment, a 15 or 20 year mortgage could save you a bundle. The reason is more of your payment goes toward the principal and you pay the debt down more quickly. By paying it of faster, you save thousands in interest over that 10 to 15 year period you avoided. CleverDude has written a very interesting piece outlining how to afford a million dollar home and mortgage considerations that are important to make.
4. Increase Your Down Payment
Your down payment should be money that is yours and that you can prove is yours, not a gift from a relative. This shows the lender you have the ability to save and are indebted to anyone else for the money. It tells them you are a good risk financially. For FHA mortgages, you will need a minimum of 5% down. While that may get you qualified, putting down more improves your situation in 2 ways. With a small down payment, lenders will require you to carry mortgage insurance so you’ll incur an additional cost equal to about 1.35% of the mortgage. FHA also charges fees of about 1.75% of the mortgage for low down payments. If you put 20% or more down, you not only avoid those fees but pay interest on a smaller loan amount.
5. Have a Down Payment Back Up Plan
In cases where you can’t meet or exceed the 5% down payment threshold, you may still be able to secure a reasonably priced mortgage. A USDA Rural Development loan has lower annual costs and upfront fees than the standard FHA loan but carries the contingency that the property must be in a “rural” area. Another option if you have the 5% but fall short of 20% is to prepay the private-label mortgage insurance at closing.
6. Get an ARM
Adjustable-rate mortgages or ARMs have a bad reputation because of the way some lenders used them during the housing crisis but used properly, they can be a great money-saving tool. For an ARM to be the right choice for you, you need to be willing to trade the uncertainty of the future for savings now. For example, you can probably get a 30 year mortgage now with an interest rate of about 4.375% as compared with a 5 year ARM at 3%.
7. Make Extra Mortgage Payments
If you can manage to make extra mortgage payments you will be doing yourself a great service. You can do this by making one additional mortgage payment each year or paying a little extra on each monthly payment. This works best if you have no other types of credit payments like car loans or credit card payments. The interest on you r mortgage is usually considerably lower than other forms of credit. You are advised to pay off other credit debt before paying extra on your mortgage to capitalize on your efforts.
8. Reassess your Home’s Value
It may have been sometime since you bought your home and its value may have changed. Unfortunately, many people are learning the value of their homes has decreased in recent years. This may work in your favor in two ways. First, if your home has decreased in value, you may be able to lower your property taxes. Second, a lower h0ome value may boost the amount of equity you have and you may be able to drop your private mortgage insurance payment. As long as your equity equals 20% or more of the new value of the home, you can kiss the PMI goodbye.
9. Refinance Your Home
This is a good option if current interest rates are lower than the one you currently have with your mortgage. There will be closing costs again and unless you are planning to stay in your home for many years, the costs may not be worth what you would save over the short term so make this decision carefully.
10. Get a Loan Modification
Loan modifications are not the same thing as refinancing nor are they the right option for everyone. With a loan modification, you are changing the terms of your existing mortgage, not applying for a new one like you do with refinancing.
In order to qualify, homeowner will need to demonstrate some form of hardship such as the payments being unaffordable or unemployment. A loan modification could lower your interest rate or extend the term of your mortgage in order to spread the payments out and make them more manageable.
11. Do Your Research
Whether you are applying for your first mortgage, considering a refinance or thinking about a reverse mortgage, always do your research. Talk to mortgage advisers and lenders and ask lots of questions. The more information you can gather, the better your decision will be.
12. Recast Mortgage
If you are able to make a bulk payment on your mortgage, you may be able to have it recast. Typically you have to make a payment of $5000 or more in order for the lender to recalculate your loan over the remainder of the mortgage period. It doesn’t shorten the time but your monthly payment will decrease and you will pay less interest.
13. Rent Vacant Rooms
If you have unused rooms, you may be able to rent them out. The rent money can be used to either help meet the mortgage payment or pay extra on the mortgage.
You may hate it now, but comparing loans will prove to be really important later. This is because you will find yourself saving a lot of money due to the foresight you have put in. It is important that you are staying updated with the different terms and conditions and looking at crucial terms mentioned in the loans. This will help you make your decision. Also, it is not a bad idea to involve others with this decision as well. A second opinion doesn’t hurt.