Are you buying a home soon? If you are, then you probably want to get the most for your money at the lowest cost, including your monthly mortgage.
Since mortgage loans are the way most people buy homes today, it’s important to know how to get the lowest mortgage payment possible.
What many home buyers may not understand is that until a mortgage is finalized and closed, most home buyers have some control over what their monthly mortgage payment will be.
Lenders tend to look at a lot of similar factors when they consider a home loan application. They examine your income, assets, debt, employment history and credit record to decide what kind of candidate you are for a mortgage loan.
However, you would be mistaken to assume that every lender will offer you the same loan terms. Many would-be home buyers seem to make this erroneous assumption, 77 percent of borrowers only apply to one lender.
If you want to know what is the best loan you can get, invest the time and a little money into researching and applying to a few different lenders. You may save thousands by getting a loan with a lower interest rate, or other more favorable terms.
A successful real estate agent tells the story of how he worked with a couple to help them buy their first home and they went to their local bank to secure a mortgage. The couple had a checking account at the bank and had occasionally received notices about the bank’s mortgage department. After visiting with the mortgage banker, and supplying her with certain documents, the couple received a mortgage pre-approval from the bank.
However, after forwarding the pre-approval to their real estate agent, the agent commented that the rate and closing costs seemed a bit high. He suggested the couple visit a local mortgage broker for a second quote.
The agent further explained that mortgage brokers are not the same as mortgage bankers as they must be licensed and often have access to a greater variety of mortgage products than those offered at a bank.
After visiting with the new mortgage broker, and supplying the same information, the couple received a lower interest rate — and with fewer closing costs — than the large national bank offered.
Most home buyers have probably heard from friends and family members that the 30-year fixed-rate loan is the only way to go. While it is nice to know that you will have the same predictable monthly payment for the duration of the loan, it is not the sole viable option for prospective borrowers.
Depending on your current assets and income, and if you expect a long career of increasing pay, an adjustable-rate loan may be just as practical as a fixed-rate mortgage in some situations.
Related >> Use a mortgage calculator to find out your monthly mortgage payment.
Adjustable-rate loans start at a typically lower rate for a term of a few years, then they can fluctuate over time. A lower initial interest rate than a fixed-rate loan could allow you to get into a better home at first.
Once your income has reached a higher level, you may refinance into a fixed-rate loan, if that works better for you. Discussing your options with your lender will help you understand how each kind of loan will be structured in your specific situation.
TIP: If you plan on only staying in the home less than 5 years, consider the lowest interest rate product for the first 3-5 years. Be sure and check that there is no pre-payment penalty or additional interest charges should you sell the home before your mortgage interest rate begins to rise.
Mortgage interest rates have been fluctuating around 3.5 to 4 percent for a 30-year fixed-rate loan since 2013. However, certain actions, such as the Federal Reserve raising the federal funds rates, can slowly increase mortgage interest rates. When the difference from week to week is only a few hundredths of a point, you might not see much effect in locking in a rate.
Historically, the loan market is hard to predict, however. If you can see that rates are going up over a long period of time (and many experts say that they will be), you may want to submit your application and lock in an interest rate as soon as you can. Rate locks usually last only about 60-90 days, so you should be prepared to buy a home when you arrange the lock.
Even if you are very well-qualified and receive the best mortgage loan the lender has to offer, you can still take your interest rate down by a little by paying discount points. In this scenario, you pay a percentage point of the total loan at closing in exchange for the lender dropping your final interest rate.
The standard drop is a quarter of a percent, but the lender may have some flexibility in its terms related to discount points. If you are trying to decide between a 30-year fixed-rate loan and a 15-year loan, a lower interest rate would drop your monthly payment. That may make it easier to choose the quicker payoff.
If the percentage of your loan in relation to the home’s value exceeds 80 percent, you may have to pay private mortgage insurance (PMI). This insurance protects the lender in the event that the borrower defaults, and could cost you as much as 1.5 percent of the total loan each year. On a $200,000 loan, that could be an additional $250 payment added to your mortgage each month.
TIP: Avoid PMI by making a larger down payment of at least 20 percent of the home’s purchase price or by getting a second mortgage for the remaining percentage above 80 percent. If neither of these are possible, then plan to refinance as quickly as possible once your equity rises above the 20 percent mark.
Your home purchase is a major investment, but that does not mean you will have to empty your bank account to make the mortgage payment each month.
By using any or all of these different approaches and tips, you can give yourself as much flexibility as possible to lower the monthly payments on your mortgage loan.
Gary Ashton is the CEO/Owner of The Ashton Real Estate Group of RE/MAX Advantage and the official real estate agent for the Tennessee Titans. Originally from England, Gary moved to Nashville by way of a brief stopover in Florida to pursue a career in music. He soon changed his focus back to his original interests of real estate and marketing. In 2004, Gary decided to make the move to real estate company RE/MAX. In 2016, at the RE/MAX convention in Las Vegas, The Ashton Real Estate Group of RE/MAX Advantage, was named as the #4 RE/MAX team in the world, as well as the #4 RE/MAX team in the USA and #1 RE/MAX team in Tennessee.
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