Buying a house is a major milestone, viewed by many people as the quintessential component of achieving the American Dream. Owning a house provides financial security, equity, stability and a sense of personal pride.
Most people can only afford to buy a house through the process of taking out a mortgage. Mortgages are a form of large loans used specifically to purchase a property. To secure a mortgage, borrowers usually have to provide a minimum down payment of 10-20% of the total cost of the loan, which is used as collateral by the mortgage company. A mortgage is generally paid back in monthly increments, typically at a fixed 10 year, 15 year or 30 year interest rate.
Monthly mortgage repayment rates are determined by the interest rate that borrowers are able to obtain, with lower interest rates offering much lower long-term costs of borrowing. Lower rates are typically only offered to individuals with great credit, but they are also determined by debt to income ratios, the current prevailing interest rate (a rate that banks charge each other to borrow money) and a variety of other factors.
Finding the best mortgage rate and negotiating the finishing touches can be extremely challenging, as the process is relatively grueling, and quite complicated. Read on for some basic tips that will help you find the best mortgage rates:
Have a Good Credit Score
Perhaps the most important component to achieving a low interest rate for your mortgage is to have a great credit score. Mortgage brokers want to know that you are a reliable and responsible borrower, who will be able to make regular and consistent mortgage repayments, and they use credit scores as the most important indication in the evaluation of potential borrowers.
A poor or even average credit score will reflect badly on your financial responsibility and could cause you to be rejected entirely from approval, or offered a loan with a high interest rate. Therefore, unless you are certain that you have an excellent credit score, make sure that you do everything you can to raise your credit score before applying for a mortgage.
Check Your Debt to Income Ratio
Significant debt can reflect poorly on your credit score and lead mortgage lenders to worry about providing you with additional funds. Ideally, your debt to income ratio should be as low as possible. Mortgage companies do not want to provide people who already have high debt to income ratios with additional funds, as this signals a riskier loan that has a greater chance of eventually ending up in default.
Before you apply to take out a mortgage, make sure to erase as much debt as possible. This includes student debt, credit card debt, previous lines of credit, other mortgages and any other kind of debt that has been legally documented. Reducing your debt to income ratio will boost your credit score and make lenders far more likely to offer you a low interest rate mortgage loan.
Get all of Your Paperwork in Order
Most mortgages require extensive paperwork, with a wide variety of personal documents, so make sure that you have all of this available and at the ready when you’re looking for a mortgage. Being slow on delivering paperwork can look unprofessional, leading it to look like you don’t have your act together, or even like you have something to hide.
Generally, mortgage lenders require two years of tax returns, W-2’s, your two most recent paystubs, your most recent credit card statements, checking account statements and savings account statements. Basically, you’ll have to document all debt and all assets or the process of securing your loan could be compromised.
Being highly organized from day one in the mortgage negotiation process will show that you’re dedicated to getting a mortgage and allow you to be fully prepared for any unexpected surprises. Make absolutely sure that you have your documents in order before beginning the process, or you could end up going through a nightmare ordeal of seemingly endless phone calls, emails and faxes.
Shop Around & Compare Rates
Each mortgage broker is likely to tell you that he or she is offering you the best deal around, but don’t take their word for it. Remember that these are salespeople, and that they have been trained to get you to sign their deal as offered. Some lenders will even resort to using tricks and loopholes to get you to sign up for a mortgage program that provides them with far more profit than they really deserve.
Don’t be misled by their salesmanship tactics, and make sure to shop around for the best deal possible. Many websites now allow you to compare mortgage rates from different companies, even providing a break-down that lets you compare other fees such as processing fees and the minimal down payments required. Use these to collect information and shop lenders against each other.
If you like a particular mortgage company but you find that another one is offering a better value deal, provide your findings to your preferred lender and ask if they can beat the price of their loan, or the interest rate that’s being offered. While it might not sound like a big difference to drop your rate by a half a point, or a quarter of a point, even small changes to mortgage rates can have unbelievably massive long-term financial implications.
Have Sufficient Funds
Mortgages should ideally only be taken out if you have sufficient savings and a stable income. Most mortgage companies require that you put at least 20% down to secure your loan, otherwise you’ll have to pay for the added cost of providing them with Private Mortgage Insurance, which is an absolute waste of your money.
If you can’t provide 20% down payment to secure your loan, consider holding off until you’re able to collect that much funding, as all the money you contribute to PMI is essentially wasted, since you won’t receive any additional equity from paying into it. PMI is a sunk cost that provides you no benefit other than allowing you get a mortgage that you otherwise wouldn’t qualify to afford.
Don’t overextend yourself by taking out a mortgage that you think or know you can’t afford, as this can only lead to financial ruin. If you can’t provide at least 10% down payment for a property, then you are shopping outside of your price range and should either look for something more affordable, or wait to secure a mortgage until you can save additional funds.
Be Prepared to Negotiate
You don’t necessarily have to settle for the first offer a mortgage broker offers you, in fact, it’s more than likely that he or she is not giving you their best possible deal up front. There’s usually some negotiating and bartering involved in achieving the best deal.
Don’t settle for a shoddy offer simply because you want to purchase your dream house. That dream could soon become a nightmare if you aren’t careful when shopping for the actual loan.
Remember that a mortgage broker’s job is basically to intimidate you to save their company and themselves as much of the profit as possible, so hold your ground firmly when it comes to negotiating a good deal and do not agree to one that you don’t feel comfortable with signing.
The Next Step
Once you’ve read all of the above suggestions and know that you’re prepared both mentally and financially to consider obtaining a mortgage, get out there and start exploring your options. Compare and contrast rates, payment plans, and up-front costs to find the most affordable loan, and remember to never settle for second best. Good luck!