If you are like most people, when it’s time to buy a home you are going to need to borrow the money for your new home. Like any loan, you’ll have to pay it back with interest. The amount of interest you pay back, along with other fees associated with the loan can vary substantially from borrower to borrower and lender to lender.
Certainly, no one ever wants to overpay for a mortgage. So, in order to avoid spending more than you have to it’s a good idea to shop for a home loan and consider all of the different elements of a loan offered by each specific lender. Only by considering the big picture and weighing the different elements – to include the interest rate, the points and the fees – only then can you determine what the best loan is for you.
Remember that choosing the wrong loan can have significant costs over the length of the loan. Getting the right loan is critical for maximizing your long term financial goals.
What to consider about your home loan
There are several important factors to consider when comparing home loans, including:
Interest rate
The most common term you’ll hear quoted by the marketing departments of home loans is the interest rate. The interest rate is the primary cost of a loan so it makes sense to find the lowest interest you can find. An important factor in determining what interest rate you’ll qualify for is to improve your credit score.
You should certainly be looking for the lowest interest rate you can find to finance the purchase of your new home. However, keep in mind, there are other costs that need to be considered when comparing one loan to another. It won’t make any sense to get a low interest rate if the other costs are exorbitant.
Fees
Every home loan will have fees that the lender will charge for various things that are all a part of the loan. Fees may be charged that are generated by third parties – such as appraisal fees. When your lender provides you with a good faith estimate for your new home loan, make sure to ask to have all of the fees detailed and identify which are third party fees.
Loan fees are certainly something to consider as the fees charged for a home loan can change the overall attractiveness of a loan – even a loan with a low interest rate.
Down payment
In today’s real estate climate, a home loan will undoubtedly require some form of down-payment. The amount of down-payment will vary from loan program to loan program. Most loans today will be a conventional loan, FHA, VA or USDA. Each of these loans has its own down-payment requirements that will vary from loan type to loan type.
Conventional Loans: Conventional loan down payment requirements can vary, loan to loan, from 5 to 20 percent.
FHA Loans – Perhaps the most common loans today because it has one of the lowest down payment requirements and the easiest to qualify for, for borrowers with a good income.
VA Loans – VA loans are guaranteed through the Veterans Administration that is available exclusively to veterans. What makes a VA loan attractive is that it requires no down payment.
USDA Loans: These loans are guaranteed through the United Stated Department of Agriculture and are available in rural areas with a maximum population limit. These loans have certain income requirements but are one of the only true no-down payment product available.
POINTS
Points are one of the more confusing aspects of a home loan and should be explored carefully so that you understand what they mean to your loan.
There are two different types of points – origination and discount. Origination Points are what a lender may charge for giving you a loan. Discount points can be purchased to reduce the interest rate. A discount rate is worth one quarter of 1percent (0.25) of the interest rate. A point is 1 percent of the amount borrowed, so purchasing four discount points would reduce your interest by 1 percent.
Purchasing discount points may sound good on the surface, but you need to know what your objectives for the loan are. Realize that the discount point is 1 percent of the amount borrowed – so if you have a $300,000 loan then each point will cost you $3,000.
To determine if paying points makes sense you have to project how long you are planning on staying in the home and if you’re thinking that you may refinance for a better loan at some point down the road. To do this, calculate the difference in mortgage payments between paying points and not paying points. You’ll have to determine when the difference between these two situations are made up by how long you plan on staying in the home. The longer you are planning on staying in the home, the more sense it will make to pay for the points.
Closing costs
Closing costs are often a variable that can make or break a deal based on the overall costs involved when obtaining a new home loan. It’s important to understand what you’re paying for. When factored into the overall cost of a loan it can change what your actually paying compared to other loans.
A popular strategy when purchasing a new home is to ask the seller to contribute a portion of your closing costs a part of the purchase price Work with your real estate agent to structure your offer so that the seller is still netting what they want and thus creating a win-win situation for both the buyer and the seller.
Mortgage insurance
Mortgage insurance is required on most loans where the deposit is less than 20 percent of the purchase price. MI rates can vary from loan to loan. MI never goes away, even as the equity in the home increases. Because MI is very expensive so if you can put 20 percent down it may be a good idea financially.
Getting the best mortgage
Most loan terms are non-negotiable, however there are things you can do to minimize what you pay for a home loan. Some of what you can do includes:
Pay Attention to Your Credit Score
Your Credit Score is probably the single biggest variable that you have control over. Ideally, start a year before you want to buy a home – work with a lender who can help you properly prepare for the loan process. Advice you may receive could include settling collection debts, paying down credit cards and clearing up any mistakes that may be found on your credit report.
Work with your lender and determine if the effort of clearing up your credit report is worth the effort comparing how much you can potentially save vs. the effort that goes into adding points to your FICO Score.
Get a detailed good faith estimate
Every lender will give you a good faith estimate that will give you all of the terms of the proposed loan that is being offered. This is a valuable tool where you can compare apples to apples and oranges to oranges in each loan and determine which lender has the best loan for you.
As mentioned earlier, ask your lender to identify actual lender fees and third party fees. Many times numbers are presented as a percentage – feel free to ask that they be provided in actual dollar amounts.
Negotiate
Many people will accept what is offered as the bottom line – never be afraid to negotiate the terms of a loan. The fees that a lender charges is usually the easiest line item to reduce. Remember; if you like most of the terms of a loan but not all of them – ask for an adjustment… never be afraid to do so.
Determine what’s important to you
It’s important not to get caught up in the moment and recognize what is important to you – every borrower has different priorities and goals. Take the time to prioritize the different elements about the loans you’re considering and prioritize them.
Most people focus on the lowest payment, and that’s fine. If you’re only going to stay in the home for 3 to 5 years, then perhaps a variable rate interest loan with a low introductory rate may work out great. If you’re more long term with your plans for the home, then a loan with a lower fixed interest rate may work.
The bottom line is that you have to put in the work and figure out what works for you. There is no magic answer or anyone that understands your goals better than you do.
Call us today at (951) 296-8887 and get the information you need to make the right decision.
For questions regarding available inventory and/or other real estate matters please contact, Mike@GoTakeAction.com. Mike Mason, Broker/Owner of MASON Real Estate Cal. BRE: 01483044, Board of Director of your Southwest Riverside County Association of Realtors® (SRCAR), Traveling State Director, California Association of Realtors® (C.A.R.). John Occhi is a semi-retired Temecula Realtor® who is pursuing his dreams and passions traveling the country, in an RV on the “American Wine Trail”. Follow his RV Wine Adventures at www.TheAmericanWineTrail.com.
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