By Susan Doktor
A terrific neighborhood. The perfect number of bedrooms and baths. The amenities and small details, from that gourmet fridge to the woodburning fireplace, that make a home “just right” for you and your family.
Finding your dream home can be a joyous experience. But for a lot of homebuyers, however, the task of finding the right financing seems like pure drudgery in comparison.
Mortgages are complex legal and financial agreements. You have a lot of choices to make before you sign one, from your down payment amount to the term of your mortgage, to the best mortgage lender to work with.
But fortunately, shopping for a mortgage is easier than ever in the digital age. You can compare as many financing deals as you like before selecting one. You can get pre-qualified for a specific loan amount and narrow your home search to include only those you can reasonably aﬀord.
You can apply for a loan online and upload all of the documents you need to provide without ever leaving home. That doesn’t sound so hard, does it?
But there is a catch. You still need a basic understanding of how mortgages work before you can make the most financially advantageous choice.
The Best Deals Go to the Most Creditworthy
Mortgage lending is a risky business. Lenders want to be sure that when you take out a loan, you’ll pay it back faithfully and on time. So they look for evidence of your ability—and predilection—to do that by examining your credit history.
The higher your credit score, the more likely you are to be oﬀered a low interest rate on your mortgage. That’s true regardless of the type of loan you take out, the term you select, your income, and even the location of your home. So before you start shopping for a mortgage—many months before is ideal—review your credit report.
If your credit needs repairing, take steps to improve it. Credit counseling or professional credit repair companies can help, but there’s plenty you can do on your own, too.
Lenders Want You to Be Invested in Your Home
You may be eligible for a no-down-payment mortgage. Government-backed mortgages, including USDA, FHA, and VA loans provide that option to eligible homebuyers.
But the more money you put down initially on your home, the less risk your mortgage represents to lenders.
So again, they’re likely to oﬀer you lower interest rates when you make a significant down payment on your home. If you put 20% or more down on your home, you won’t have to pay for Private Mortgage Insurance (PMI) which can add a hundred dollars or more to your monthly mortgage payment.
Shorter Term Mortgages Cost Less
Most lenders will quote you a mortgage rate based on a 30-year mortgage by default. But if you can take out a shorter mortgage, you’ll likely be rewarded with a lower interest rate.
You’ll pay more each month on a shorter-term mortgage, but you’ll also reduce the lifetime cost of your loan. And you’ll pay oﬀ your house more quickly.
So compare multiple scenarios to see how much you can save with a shorter-term loan. Many companies oﬀer easy-to-use mortgage calculators to help you estimate monthly payments and calculate the lifelong cost of your loan.
Mortgage Rates Fluctuate Over Time
The global pandemic ushered in a period of historically low mortgage interest rates. While they’re inching higher now, it’s still a great time to get a mortgage. With a fixed-rate loan, you have the opportunity to lock in an interest rate for the entire term of your mortgage.
Adjustable-rate mortgages (ARMs) almost always come with lower initial rates. That makes them very attractive to some homebuyers. But depending on how your ARM is structured, in three, five, seven, or ten years’ time, your lender will change your mortgage rate.
Given how low rates are right now, you can expect your interest rate to rise if you take out an ARM. Nobody can predict by how much. But again, you can use a mortgage calculator to figure out how your monthly mortgage payment would change with say, a 1% interest rate increase. Estimating how your payment will change can help you figure out the actual savings an ARM would deliver versus a fixed-rate loan.
Get Some Expert Advice
Don’t be shy about delegating most of the financial figuring to the lenders you work with. Mortgage companies want your business and are there to serve you. They “do the math” for a living and most will be happy to do it for you. If you get any pushback when you ask for that type of assistance, take your business elsewhere.
While many homebuyers feel like they’re at the mercy of mortgage lenders, there isn’t just one driver’s seat in the mortgage process. So take the wheel. Step on the brakes if you don’t feel like you’re being treated fairly. And ask as many questions as you like.
Susan Doktor is a journalist, business strategist, and principal at Branddoktor. She writes on a wide range of topics, including finance, technology, and historic homes. Follow her on Twitter @branddoktor.