3 Numbers to Know Before Applying for a Mortgage
They can make all the difference when it comes to getting approved at a low rate.
- Before applying for a mortgage, you need to know how much it will cost.
- You should find out the upfront fees and cost over time.
- You also need to know if lenders are likely to approve you for the loan.
Applying for a mortgage is a major financial decision. If you're approved and move forward with purchasing a property using the loan proceeds, you'll be committing to pay your lender many thousands of dollars for decades to come.
You'll want to get the best deal you can on a home loan, and maximize the chances of getting approved by a variety of lenders so you can shop around for the best mortgage rates.
To ensure you're as prepared as possible to evaluate loan options and get an affordable mortgage, there are three numbers you need to know.
1. Interest rate
The interest rate determines the amount you will pay for the loan. It's expressed as a percentage, such as 3%. You'll pay interest each year on the loan balance until it's paid off.
Most lenders will provide you with an estimate of your interest rate before you submit a formal application for a loan. Many can do this without a hard inquiry on your credit, which would stay on your credit report for two years and which could lower your score slightly.
Getting this estimate up front helps you determine if one loan is more expensive than another so you can make the decision to apply only for the most affordable loan.
2. Closing costs
Closing costs are upfront fees you have to pay when you finalize your loan. They include expenses for things such as the appraisal, credit check, mortgage origination fee, transfer tax, and title insurance.
If you must pay points, then these will be part of your closing costs as well. Points are fees you can pay to reduce the interest rate on your loan. For example, you could pay a point which would cost 1% of your loan amount and reduce your interest rate by 25 basis points.
Lenders should provide an estimate of how much your closing costs will be early in the application process. If one lender's closing costs are much more expensive than another, then you may prefer to choose the lender with the lower closing costs.
That's especially true if two lenders are offering you the same interest rate but one is requiring you to pay points to get it. In that scenario, the loan where you have to pay the points is much more expensive. You'd be paying to pay down the interest rate, just to make it equal to the rate another lender is offering at no additional cost.
3. Loan-to-value ratio
Finally, you need to know what the value of your future loan is, relative to the market value of your home. For example, if you want to borrow $300,000 to buy a $350,000 home, then your loan-to-value ratio would be around 86%.
Ideally, your loan-to-value ratio would be 80% or below, which would mean you'd make a 20% down payment. If you do that, you will avoid having to pay an added fee for something called private mortgage insurance (PMI), which lenders require you to buy to protect them from losses if you have a small down payment.
If you can't come up with such a large down payment, there are lenders that allow a larger loan-to-value ratio. In fact, with a down payment as low as 3%, it's often possible to find lenders offering loans with a 97% loan-to-value ratio.
However, you will have less of a choice of lenders and can expect a higher interest rate as well as added PMI costs. You need to know the loan-to-value ratio before applying for a loan so you'll know which lenders are likely to approve you and what a realistic interest rate is.
By understanding each of these three numbers, you can make informed choices as you decide which loans to apply for and compare the loan offers that lenders make to you. This will help you find the best mortgage loan for your needs.
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