You wouldn’t think of overpaying $50,000 when buying a new house, but you could pay that much extra if you’re not careful shopping for a mortgage.
If you can knock just one point off a mortgage — lock in a 4 percent interest rate instead of 5 percent, for example, for a 30-year term — you could save enough to put your kids through college or retire earlier.
Check out mortgage shopping tips from Money Talks News savings expert Stacy Johnson in the video below, and then keep reading for more advice on finding the right home loan.
Step 1. Polish your credit
To get the best mortgage deal, you need a spotless credit history. This boils down to concrete numbers.
“We literally are told by the credit companies we pull from what the potential rise in their score could be and what actions they have to take to get it there, and we coach them to do that,” says Tina Mulligan, regional sales manager at The Mortgage Firm in Pompano Beach, Florida.
Start polishing your credit score months or even a year ahead of applying for a mortgage.
“There is no quick fix for bad credit scores,” warns Experian, a global credit-reporting firm.
As money expert Stacy Johnson advises in this Money Talks News video about raising your credit score, go to AnnualCreditReport.com, get a free copy of your history and check for mistakes or other negatives appearing on your account. Also, pay down debt so your balances are 30 percent or less of your available credit. You could also ask current lenders for higher credit limits.
However, don’t open new accounts just to show a larger amount of available credit, warns Experian. Lenders may think that those applications for new credit cards mean you’re taking on more debt. And don’t close unused credit accounts, because that will lower your available credit while raising your credit-utilization rate.
While many factors go into your credit score, the most critical is paying your bills on time, Experian says.
Check out Credit Restoration in the Money Talks News Solutions Center for more help, or check out this mortgage tip worth up to $50,000.
Step 2: Shop smart
The Internet makes it easy to learn about and compare all types of loans from dozens of lenders.
Home loans are available from thrift institutions, commercial banks, mortgage companies, credit unions, and mortgage brokers, who match you with a lender rather than lending money to you directly, the Federal Trade Commission says.
Learn about all costs affecting the loan, says the FTC, which offers a worksheet. It highlights these primary considerations:
- Down payment: Know how much you can afford. While 20 percent of the purchase price is a good benchmark, some lenders require only 5 percent. Some government-assisted programs, including FHA (Federal Housing Administration) and VA (Veterans Affairs) loans, may require substantially less than the benchmark.
- Interest rates: Compare fixed or adjustable terms. Make sure the loan’s term is stated as annual percentage rate (APR), and find out how long the rate you’re quoted will be available, because rates can change daily.
- Points: The fees paid to the lender or broker for the loan may be linked to the interest rate. The more points you pay, the lower the rate. Ask for points to be quoted to you as a dollar amount, rather than just as the number of points, so that you will know how much you will actually have to pay.
- Fees: A lender may charge for loan origination or underwriting, brokerage and settlement (or closing costs). Every lender or broker should be able to give you an estimate of its fees, the FTC says, adding, many fees are negotiable. Some fees are paid when you apply for a loan (such as application and appraisal fees), and others are paid at closing. If you borrow money to cover the fees, the amount will be added to your loan, adding to your costs over 30 years.
Step 3: Make a deal
Choose three to five lenders, pick up the phone and talk to them. Compare their rates and their fees. Pit those lenders against each other. You can track their terms on this FTC worksheet.
Ask lenders or brokers if they can give you better terms than the original ones they quoted or than those you found elsewhere — and make sure they don’t, say, lower one fee while boosting the interest rate to make up the difference.
Ask if the price contains any overages, the difference between the lowest available price for a loan product on any given day and any higher price you may agree to pay. The loan officer or broker can pocket the difference.
Once you’ve homed in on the best possible deal, get your pre-approval for that loan.
Most lenders will allow you to lock rates for 30 to 45 days. But be sure you can close the property within that window. If you can’t, continuing the lock could cost extra. So when you’re negotiating your loan and fees, consider attempting to negotiate a longer lock as well.
Now go get that home of your dreams.