Home Loans

Tips for a Better Home Loan Decision

and

How to Get a Better Deal on a Home Loan

It is often said that for most people, the purchase of their home will be their single greatest expenditure. In truth, however, the purchase of a mortgage--the points and interest paid over the life of the loan--often equals or exceeds the sale price of the house. Thus, as everyone knows, it's essential to get the best deal on your mortgage as possible. Doing so, however, is not an easy proposition. To get a truly great rate, you'll need not only to shop smartly for a mortgage, you also need to establish yourself as a good credit risk before you apply.

Steps

1. Wait. The easiest way to get a lower rate is to wait until the interest rates on loans across the board are at low levels. Interest rates fluctuate a great deal, sometimes even during the same day, but there are times when they are simply far lower than at other times. Keep in mind, however, that (all other things being equal) periods of low interest rates often see increased home prices.
2. Improve your credit. Make loan and other payments on time, especially over the months leading up to the loan application. Every delinquency will result in a lower credit score The better your score, the better your deal. Keep in mind, however, that it typically takes at least a couple years to significantly improve your credit. Don't close accounts when you pay them off - credit capacity is an important part of credit scoring. Unused open accounts do not help credit scores, however - higher scores come from current use of credit. Use it - pay it off - repeat.
3. Get the mortgage first if multiple financial obligations are going to pop up in the near future. Numerous credit inquiries, such as new applications for credit cards, can hurt a borrower's score, especially if they're filed in the months prior to the home loan review process. In addition, if you add new debt expenses shortly before applying for a mortgage, the loan underwriter may question whether you'll be able to make all your payments, so avoid making large purchases in the months before you apply.
4. Save as much money as possible for your down payment. A major determinant of your interest rate will be the loan-to-value ratio. These days you can sometimes get a mortgage for up to 97% of the value of the home (100% if you are a Veteran)(as of Fall 2008), but if you can reduce the loan amount to 80% of the value, you'll get a better rate. The larger your down payment, the more equity you will have in the home from the start. With more equity, the loan is a lower risk for the lender, and you'll be rewarded with a lower interest rate. A lease option may also help you build equity if you're not in a position to make a large down payment.
5. Reduce upfront expenses. Points--1 point equals 1% of the loan amount--and other upfront fees can drive the cost of your loan through the roof. Always take these into account when shopping for a mortgage. "Points" are a way of obtaining a lower interest rate, and may be necessary to make the payment make sense relative to your income.
6. Think small. Don't shop for that 6-bedroom house right off the bat. Lenders consider "payment shock" when approving loans. If you go from a relatively low monthly housing payment to a huge one, you'll either end up covering too big a loan with too little money, or you won't qualify at all.
7. Shop around. Mortgage rates for the same person can differ widely from lender to lender, so explore your options. If you belong to a credit union or if you've been with a bank for a long time, you'll often find your best rates there, though it's still a good idea to check around. A mortgage broker, who sifts through many lenders, may be able to find you the best rate. On the other hand, a Lender (not a broker)like a credit union does not have to cover the overhead of a broker - you may find lower rates, or lower costs.
8. Get pre-qualified, or "pre-approved". The difference is a pre-qualification is based on information voluntarily submitted by you to a lender, who then provides an 'estimate' of the maximum mortgage amount you can afford. A pre-approval means the borrower, has had the lender perform credit checks, income verification, and various other underwriting tasks and has been approved for a specific mortgage amount. A pre-approval is a much stronger tool, obviously.
9. Lock in a low rate. Simply being approved for a loan amount doesn't mean you'll get the interest rate you've been quoted. You'll need to lock in the rate.

Tips

• Do the math. Don't just listen to what the broker or loan officer tells you. Get out your calculator and calculate the total cost of the home including the loan. If the lender doesn't provide this information, simply multiply the monthly payment amount by the number of payments, and add any points or other upfront fees. Don't be shocked - you pay more when you use a mortgage. For example, a $100,000 mortgage for 30 years at 6% has a payment of $600. $600 x 360 months is $216,000. For adjustable mortgages, however, there is a bit more uncertainty about the total cost because after an initial fixed period the interest rate may go up or down. However, you should still be able to calculate the minimum and maximum cost according to the terms of the loan.
• Be honest. If your lender doesn't have a truthful application, your quoted rate won't mean a thing (and you could be prosecuted for fraud in some cases). Discuss your personal situation, ask questions and make sure the options presented by the lender are best for you.
• Prioritize your debt, and if you must miss a payment, miss it on a low-priority loan (i.e. a credit card) rather than on an existing mortgage. Credit scoring systems look at the performance of similar loans first when deciding what type of score to assign. The most weight will be given to the performance of another mortgage.
• Which type of mortgage offers the lowest rate. It depends on the lender and on market conditions, but generally a shorter term (10 or 15 year) fixed mortgage will offer the lowest rates. Very short term (i.e. 5 years) adjustable rate mortgages (ARMs) may also offer excellent rates, but the upfront fees on these may drive the total cost up quickly.