Home-Buying 101: Getting a Mortgage That Saves You Thousands

Couple holding a tiny house
Photo by Ocskay-Bence / Shutterstock.com

You have picked your dream house. You want it desperately, and now you need to determine how to pony up the cash. If you’re like most people, you need to find a mortgage… Stop right there.

Nearly half of American homebuyers don’t take the time to shop around for the best deal on a mortgage, according to government statistics. This is a mistake that can cost tens of thousands of dollars over the term of the loan.

So, even though you may be chomping at the bit to buy a property, get your financing in place before you set out to look at houses. Here’s how:

1. Polish your credit score

Having an excellent credit score gives you access to lower rates because you’re considered less of a risk to lenders. So make sure yours is as good as it can be before applying for a mortgage.

“You want to make sure you keep that score as high as you possibly can,” says Tina Mulligan of The Mortgage Firm, based in Orlando, Florida. “And you want to be able to keep your credit clean of any blemishes at least two years before searching for a house.”

Check your credit reports for problems or errors. It can take time to fix mistakes, so start this process as much as a year in advance.

For tips on how to proceed, Money Talks News has plenty of resources: Check out 7 Fast Ways to Raise Your Credit Score and How to Repair Your Credit. For additional help, visit our Solutions Center section on Credit Restoration.

The key element in learning whether your credit has improved is your FICO score, which is now accessible for free through a variety of sources. Check out “Hallelujah: 5 Ways to Get FICO Scores for Free.”

2. Focus on affordability

The most common mistake homebuyers make is finding the home before getting financing for the purchase — or even before figuring out what they can comfortably afford.

There are expenses associated with home ownership and mortgages that are not immediately obvious. These include: taxes, insurance, homeowner fees, bank fees, repairs, appliances, maintenance and improvements.

Money Talks News founder Stacy Johnson offers tips for thinking through the whole package here: “How Much House Can You Afford.” You also can get a good idea of your upper price limit by using one of the numerous online calculators; MSN has one.

3. Shop with gusto, starting online

Most people spend more time shopping for TVs than they do comparing mortgages, according to the Consumer Financial Protection Bureau.

But think about it. Say you borrow $300,000 on a 30-year mortgage. Lock in a 4 percent interest rate, and over the next 30 years you’ll pay $215,000 in interest. But lock in a 5 percent rate, and the tab swells to $280,000. That’s $65,000 more: enough to retire a year earlier or send a kid or two to college.

The Internet makes it easy to comparison-shop the mortgage offerings of many lenders, including commercial banks, thrift institutions, mortgage companies and credit unions. As a starting point, go to the Mortgage page in our Solutions Center.

Pick the four lenders offering the lowest APRs, or annual percentage rates.

Many people opt for a traditional 30-year, fixed-rate loan. But there are other common loan structures — including adjustable rate mortgages (ARMs) and hybrids — that could make more sense, depending on your circumstances. See How to Choose the Right Mortgage Option for You to get familiar with the different products.

When comparing deals you can get from competing lenders, make sure that you are comparing apples to apples. So, be sure you’re getting the cost of mortgage products with the same terms — say, a 30-year, fixed-rate loan of $250,000 with no points, for instance. (Points refers to a percentage of the loan amount paid up front in exchange for a lower interest rate.)

Which leads you to the next step.

4. Negotiate with lenders

Play one lender against another. One way to do this is to start with a spreadsheet of the competition’s online rates. You can then call the lenders and ask them to verify the fees and start comparing the terms.

If one lender quotes a 5 percent rate, see if that lender will match the lower rate offered by a competitor. If one charges an $800 processing fee, look for a lender who charges zilch.

On that note, be sure to get an explanation of fees: A mortgage with a lower interest rate often will have higher fees for a variety of things, such as loan-origination or underwriting fees, broker fees, and settlement or closing costs. Ask what each fee covers, and find out which ones can be dropped or reduced.

Once you get the best possible terms, go ahead and do the deal — but also look at the settlement statement to make sure all that was promised is in writing.

If you reach an agreement, ask for a written lock-in that includes the rate you agreed upon and states how long the lock-in lasts. There are cases in which the originally quoted lock-in rate expires before the papers are signed.

5. Get pre-approved for the loan

Most Realtors recommend you get a letter of pre-approval for your loan before you start home shopping, according to realtor.com.

Note that lenders can provide pre-qualification letters and pre-approval letters — both show that you’re on track to get financing, but they are not one and the same. Pre-qualification is usually based on a cursory look at your overall financial picture, including your debt, income and assets. Being pre-approved for a loan, which involves an exhaustive look at your finances and credit, means a lender has already agreed to a loan up to a certain amount. Pre-approval carries more weight.

Being pre-approved is especially crucial if the market is competitive and the properties you’re looking at may draw multiple bids. When you see what you want, you are ready to pounce. On the flip side, pre-approval saves you from wasting time looking at houses that turn out to be out of your price range.

Now that you have a way to pay for it, go find that dream house. Almost without a doubt, house shopping will be more fun than mortgage shopping. But if you have done the mortgage shopping right, it will prove to be time extremely well-spent.

Share your ideas and experiences with mortgage shopping below or on our Facebook page.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
8 Products That Solve Everyday Annoyances
8 Products That Solve Everyday Annoyances

These items put an end to the daily irritations that bug you the most.

8 Things You Can Buy for $1 or Less on Amazon
8 Things You Can Buy for $1 or Less on Amazon

They say you get what you pay for — but not always. Sometimes, you can uncover a good deal at a great price.

The Most Common Reason That Older Adults Fall Down
The Most Common Reason That Older Adults Fall Down

The good news: It’s possible to avoid potentially devastating falls.

How to Buy a Refrigerator, Step by Step
How to Buy a Refrigerator, Step by Step

Here’s how I got the perfect appliance at the perfect price.

10 Purchases You Should Not Put on a Credit Card
10 Purchases You Should Not Put on a Credit Card

Credit cards offer many conveniences and protections, but sometimes it’s simply smarter to keep the plastic tucked away.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

11 Things Retirees Should Always Buy at Costco
11 Things Retirees Should Always Buy at Costco

This leader in bulk shopping is a great place to find discounts in the fixed-income years.

Over 50? The CDC Says You Need These 4 Vaccines
Over 50? The CDC Says You Need These 4 Vaccines

Fall is the time to schedule vaccines that can keep you healthy — and even save your life.

11 Senior Discounts for Anyone Age 55 or Older
11 Senior Discounts for Anyone Age 55 or Older

There is no need to wait until you’re 65 to take advantage of so-called “senior” discounts.

11 Household Items That Go Bad — or Become Dangerous
11 Household Items That Go Bad — or Become Dangerous

When you get the impulse to stockpile these everyday items, pay close attention to their expiration dates.

8 Things You Can Get for Free at Pharmacies
8 Things You Can Get for Free at Pharmacies

In this age of higher-priced drugs and complex health care systems, a trip to the pharmacy can spark worry. Freebies sure do help.

7 Ways to Boost Your Credit Score Fast
7 Ways to Boost Your Credit Score Fast

Your financial security might soon depend upon the strength of your credit score.

These Are the 4 Best Medicare Advantage Plans for 2020
These Are the 4 Best Medicare Advantage Plans for 2020

Medicare Advantage customers themselves rate these plans highest.

The 10 Most Commonly Stolen Vehicles in America
The 10 Most Commonly Stolen Vehicles in America

A new model parks atop the list of vehicles that thieves love to pilfer.

19 High-Paying Jobs You Can Get With a 2-Year Degree
19 High-Paying Jobs You Can Get With a 2-Year Degree

These jobs pay more than the typical job in the U.S. — and no bachelor’s degree is required.

The 15 Worst States for Retirees in 2020
The 15 Worst States for Retirees in 2020

Based on dozens of metrics tied to affordability, quality of life and health care, these are not ideal places to spend retirement.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

10 Reasons Why You Should Actually Retire at 62
10 Reasons Why You Should Actually Retire at 62

If you can, here are several good reasons to retire earlier than we’re told to.

26 States That Do Not Tax Social Security Income
26 States That Do Not Tax Social Security Income

These states won’t tax any of your Social Security income — and in some cases, other types of retirement income.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

5 Keys to Making Your Car Last for 200,000 Miles
5 Keys to Making Your Car Last for 200,000 Miles

Pushing your car to 200,000 miles — and beyond — can save you piles of cash. Here’s how to get there.

14 Things That Are ‘Free’ With Medicare
14 Things That Are ‘Free’ With Medicare

These services could save you money and help prevent costly health problems.

5 Things That Make Life More Meaningful for Retirees
5 Things That Make Life More Meaningful for Retirees

Retirees agree: These are the things that give them purpose and fulfillment in their golden years.

15 Amazon Purchases That We Are Loving Right Now
15 Amazon Purchases That We Are Loving Right Now

These practical products make everyday life a little easier.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.