Shopping for the Best Mortgage

For many people, a home mortgage will be the biggest financial obligation of their lives. For this reason, getting a good mortgage rate is essential. Even a 0.5% difference in interest rates can either save or cost you tens of thousands of dollars over the life of the loan. Below is an overview at the process of shopping for a loan.

Check Your Credit Score

Credit scores help lenders determine who qualifies for mortgages and the interest rates they will pay. Generally speaking, the higher your score, the better the terms. Start checking your reports at least six months before applying for a mortgage. Starting early also gives you extra time to demonstrate good credit habits, such as paying all your bills by their due date.

Determine Which Type of Mortgage is Best for You

• Fixed Rate Mortgage
  A fixed rate mortgage carries a set interest rate that won’t change during the term of the loan. The longer the term of your loan, the lower your monthly payments will be, but the more you’ll pay in total interest costs over the life of the loan. Fixed-rate loans can be a good choice for homeowners who appreciate the predictability of knowing what their monthly mortgage payments will be for years into the future.

• Adjustable-Rate Mortgage (ARM)
  An adjustable-rate mortgage is a loan with an interest rate that can change periodically. While the initial rate is generally lower than the rate on a fixed-rate mortgage, the rate can rise after that, subject to the terms of the loan. ARMs can be a good choice for buyers who anticipate declining interest rates in the years ahead or who plan to move before their loan’s interest rate is adjusted.

Shop Multiple Lenders

Mortgage rates can vary from lender to lender, even for the very same type of mortgage. So it pays to shop around. Banks, savings and loan associations, and credit unions are the traditional sources for mortgages. In recent years, nonbank financial companies have also gained a major share of the mortgage market.

Using a mortgage is another option. Mortgage brokers work with a number of different lenders and can help you find a suitable mortgage, sometimes with a better rate than you could get on your own. However, they are often paid commissions by lenders, which may give them an incentive to steer you toward a particular lender even if there are better options available.

Ask for a Pre-Approval Letter

Once you have found one or more lenders that seem like good prospects, you should ask them for a pre-approval letter. A pre-approval letter isn’t a formal loan offer but indicates that the lender has performed a credit check or other investigation of your financial affairs and would be willing to lend you up to a certain amount of money.

Being pre-approved for a mortgage can give home buyers an edge in the real estate market because prospective sellers will know that they’re serious about any bid they make and have the money to back it up. Getting a preapproval doesn’t commit you to using that lender for your loan. 

Obtain Loan Estimates

If you have found a property you want to buy, you can obtain a loan estimate from the lenders that you are considering. This document details the type of loan, estimated interest rate, monthly payment, and total closing costs, along with estimated tax and insurance costs.

A loan estimate is not a guaranteed offer of a mortgage but indicates the terms you can probably expect if you go with that lender. Once lenders provide estimates, borrowers can sometimes negotiate for better terms, especially if they are able to make an above-average down payment or if they have excellent credit histories.

Final Step – Formalize the Loan

Loan estimates are typically good for 10 business days. If you have decided on a particular lender, you should notify them during that time frame and follow up with any additional information they request. 

If you are happy with the proposed terms, you can request a written rate lock. The rate lock will keep the loan’s interest rate from going up if market interest rates change before the deal is finalized. Most lenders do charge a fee for this.

Obtaining a good mortgage rate takes a little work, but it can really pay off in the long run!

 

Debbie Austin is a realtor associate with Keller Williams, Roseville and has been helping clients buy and sell property in the area for 18 years. If you have a specific real estate question you wish to see addressed, contact Debbie at (916) 223-8144 or visit debbieaustinrealty.com.