You’ve decided to take the plunge and become a homeowner. Congratulations! Before you get started, it’s important to understand the basics of financing your home purchase.
Knowing what to expect and having the information you need can help you make good decisions and negotiate the best deal possible. Here’s the inside scoop about how lenders determine mortgage rates.
What’s involved?
Lenders will be asking you a lot of questions before offering you a mortgage, so it pays to do your homework.
How’s your credit?
Your credit scores tell lenders how you manage your finances. Credit scores can range from 300-850. The higher your credit scores, the better your chances of being approved for a mortgage with good terms. Request reports from the three main reporting agencies, Equifax, Experian and TransUnion.
Scoop: You’re entitled to receive a free report once a year from each agency. Check your reports for errors or fraud and make corrections.
How much is the home?
It helps to have a general idea of the costs of homes you’re interested in to get an idea of how much money you’ll need to borrow.
Scoop: Closing costs, mortgage insurance, points and other fees determine what you’ll ultimately pay for a mortgage. See “Points versus interest.”
How much of a down payment can you afford?
The more money you can put down, the less money you’ll need to borrow. Making a down payment of 20% or more will help you get a lower interest rate, reducing the amount you’ll pay over the life of the loan.
Scoop: Lenders may require buyers who put down less than 20% to carry private mortgage insurance.
What type of loan are you looking for?
Lenders can choose from a variety of loans, including conventional, FHA (Federal Housing Administration), USDA (Department of Agriculture) and VA (Department of Veterans Affairs) loans. Each type of loan has different eligibility requirements.
Scoop: Review your options carefully since each type of loan impacts the amount you’ll pay.
What kind of terms are you interested in?
Compare both fixed- and adjustable-rate mortgages (ARMs). The length of the loan, the interest rate and the type of loan all factor into your monthly payment.
Scoop: While ARMs can cost less at the beginning, they may end up costing you more than a fixed-rate mortgage over time.
Points versus interest
When you get mortgage quotes, you’ll see that lenders will offer loans with different interest rates and points. Points, a part of closing costs, are an upfront fee you pay to borrow money from the lender. Paying more points will lower your interest rate and reduce the amount you’ll pay over the life of the loan.
On the other hand, lenders may offset closing costs if you opt to go with a higher interest rate. While you’ll pay less up front, you’ll pay more over the life of the loan.