November 28th, 2016 5:08 AM by Jackie A. Graves, President
average interest rate for a 30-year fixed-rate mortgage recently hit 3.47%,
very close to the 3.31% all-time low of November, 2012. Clearly, it's a great
time to be borrowing money in order to invest in a home, as loans have rarely
been this inexpensive. If you're not savvy, though, you can still end up paying
a lot more than you need to, hurting your financial future and making it harder
to achieve your goals. Here are three smart moves to make as you go about
buying a home.
It can be very costly to ignore your credit record and your
credit score. Your credit score is based in large part on your credit history,
so for best results, be sure that your record is good and error-free before
applying for a mortgage. (You're entitled to a free copy of your credit report
annually from each of the three main credit agencies -- visit AnnualCreditReport.comOpens
a New Window. to order them.) Some ways to improve your credit scoreOpens
a New Window. include checking your credit report
for errors and having them fixed and paying your bills on time. You might also
benefit by paying off a lot of debt to lower your debt-to-available-credit
ratio.Lenders like to see you owing only about 10% to 30% of the sum of all your
credit limits, because it suggests that you have your debt under control and
can afford to take on some more debt via the mortgage you're seeking.
How much of a difference will a good score make? Potentially a
huge one. The higher your score, the lower the interest rates that lenders will
offer you. According to a calculator at MyFICO.com, if you're borrowing
$200,000 via a 30-year fixed-rate mortgage, and you have a top FICO score, in
the 760 to 850 range, you might get an interest rate of 3.28%, with a monthly
payment of $874 and total interest paid over the 30 years of $114,684. If your
score was 630, though, your rate would be 4.87%, with a monthly payment of
$1,058 and total interest of $180,899. That's $184 more per month ($2,208 per
year) and a whopping $66,215 more in interest. If you're able to boost your
credit score enough to end up with a monthly mortgage payment that's $150
lower, that will amount to savings of $1,800 per year -- and a hefty $54,000
over the life of the loan.
another home-buying tip that not everyone knows. Once you're house-hunting in
earnest (as opposed to just visiting an open house or two every now and then),
get pre-approved for a mortgage by a lender, not just
pre-qualified. What's the difference? Being pre-qualified means much less. It
typically involves your giving a lender some financial information about
yourself, such as your income and assets. The lender will then tell you how big
a mortgage you may qualify for. The process is typically free, which is nice,
but you haven't been vouched for in any robust way by the lender.
Pre-approval, on the other hand, involves letting the lender see
documentation of your finances and look up your credit rating. You end up with
a conditional commitment from the lender to lend you a certain sum of money.
That can make you a much more appealing and credible potential buyer when you
run across the home you want. If there are others interested in the house, your
offer may be favored over those from non-pre-approved people.
Finally, once you're ready to ink a mortgage deal, be sure
you're getting the kind of loan that will serve you best. Don't borrow the
maximum possible amount, as that can have you stretched thin financially.
Buying less home than you can afford will give you a margin of safety and help
you be able to save to reach other goals, such as flush retirement funds.
Weigh the pros and cons between fixed-rate and adjustable-rate
mortgages (ARMs). A fixed-rate loan is great when interest rates are low (as
they are now), especially if you may be in the home a long time. An ARM can
make sense if interest rates are likely to fall or if you expect to only own
the home for a few years. Weigh the pros and cons of 30-year loans vs. 15-year
loans, too. A shorter loan will give you higher monthly payments, but you'll
pay far less in interest over the life of the loan. A longer loan will give you
lower monthly payments -- letting you buy more house if you want to. (It can be
a good strategy to get a 30-year loan with no penalties for making prepayments.
That way you can pay more than your monthly obligation whenever possible,
shortening the life of the loan and avoiding paying a lot in interest.
Learn more about mortgages and you may be able to save even more
on what will likely be one of the biggest investments you make in your life.
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