One of the most unpleasant aspects of buying a home is applying for a mortgage. The entire process is stressful, and even for experienced home buyers, the ins and outs of obtaining financing can be downright confusing.
Before you go start negotiating with your lender, take a few minutes to read and consider these critical pointers.
Be aware of how mortgage lenders make their money
Hopefully it goes without saying that you should shop around for the best deal when applying for a mortgage loan. But doing that successfully means more than just finding the lowest interest rate.
Yes, the interest rate is technically the cost of the loan, but there are a few other important considerations that can have dramatic effects on the overall cost of your mortgage.
For example, every lender will charge you a host of fees at loan closing. Some of those fees are standardized or non-negotiable, like government filing fees, attorney fees, and taxes. Other fees, though, can vary widely. The origination fee is a great example. This fee is paid up front and covers the bank's administrative costs in the loan process (and also helps boost their profits).
Some banks may charge you 1% of the total loan amount as an origination fee. Other banks may charge you just 0.25%. For a $200,000 mortgage, that difference alone is worth $1,500 in savings on day one!
Further, most all lenders will offer you the opportunity to buy "discount points" to lower the interest rate on your loan. If you anticipate holding the mortgage for a long period of time, generally eight to 10 years or longer, buying those points up front can save you a good amount of money in the long term.
Buying a discount point is, in essence, paying the bank some interest up front in order to pay less later. The savings come on the back end, meaning you only save money over the long term. If you move or refinance too soon, buying discount points could end up being more expensive than forgoing the points and simply paying the higher interest rate.
And one last note about discount points: Not all banks charge the same amount for each point. Generally, a discount point is 1% of the loan amount, but the change in your interest rate can vary from 0.125% to 0.25%. That may seem like a small difference, but over five, 10, or 15 years, the savings can vary dramatically.
The bottom line: Shop around for more than just the lowest interest rate. Ask each lender about fees, discount points, and any other costs associated with the mortgage.
Be wary of salesmanship
We'd all like to believe that the friendly mortgage lender sitting across the desk has your best interests in mind. Unfortunately, though, that isn't always the case.
The mortgage lender is a salesperson; it is their job to find people just like you and to sell them on a mortgage. They often have sales quotas just like any other salesperson in any other field. Understanding that can go a long way in ensuring you get the best deal.
As you talk with the lender, be on the lookout for salesmanship and closing techniques intended to get you to sign with that bank before you're ready. If you feel pressured to act before you're ready, that's your queue to walk away and take a breath.
Commit yourself to shopping around for at least a few weeks before deciding on a lender. Never accept the first offer you receive. Remember, the lenders objective is to finance your home before the other banker down the street does. If you come back next week or the week after, they will still be there, ready and willing to make you a loan.
Lastly, give your credit report a double check
When you decide to buy a home, you will have a sense of what you can and cannot afford. You'll know what your down payment can be and how much of a monthly payment you can afford. If you don't, sit down with your paycheck and bills and create a budget of your typical monthly cash flow. With this, you can easily substitute in your new, projected mortgage payment to get a feel for what kind of payment you can comfortably pay.
What you may not know, however, is what your credit report says about your credit history. That credit report is the biggest "X" factor in not only obtaining the best deal, but perhaps even getting the loan at all.
Head over to AnnualCreditReport.com and make sure the information on file with the three credit bureaus is accurate. It'll only take a few minutes, and it ensures that the bank's review of your credit history is an accurate representation of your ability to repay your debts.
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