November 2nd, 2016 5:05 AM by Jackie A. Graves, President
Buying a home is a major investment. If you
want to avoid paying more than you have to and save many thousands of dollars,
make smart mortgage decisions. That can benefit your financial future and help
you meet more goals.
mortgage is a big deal -- since the largest investment(s) you ever make in your
life will probably be the home(s) you buy. Thus, for maximum benefit and in
order to more easily reach your financial goals, learn more about how mortgages
work and how you should best go about securing one. Here are five valuable
Don't pay more than you have to when buying a home.
Shop around for the best rate
understand that interest rates vary and a little time spent shopping around can
help you get a better rate. A seemingly small difference in your rate can
actually make a big difference in the long run, as mortgages involve big
balances and long payment periods.
example, imagine that you're buying a $250,000 house and taking out a $200,000
mortgage at 3.75%. Your monthly payments will be about$926. If you got a 3.6%
rate, though, those payments would fall to $909 per month. That's a difference
of $17, but multiply it by the 360 payments you'll make over the life of a
30-year mortgage, and it comes to $6,120 -- a rather meaningful sum.
lenders use different calculations when they evaluate your credit-worthiness
and offer you an interest rate. Check with your own bank(s) first, as they may
give you a bit of a discount on the interest rate because you're a customer.
But check with other banks, too -- and with credit unions, which often offer
lower interest rates. You might also consult a mortgage broker.
offer a wide range of loans and can be especially helpful if you have an
underwhelming credit record. A visit to Bankrate.com can help you zero in on
the best rates in your area and beyond.
A poor credit rating can give you lousy interest rates
your credit record and credit rating, as they can make a huge difference in the
rates you're offered for a mortgage. For example, check out these sample rates
recently listed 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 don't
have a good credit score, it can be smart to spend some time boosting it before
starting to buy a home. Ways to do so include fixing errors in your credit
record, paying bills on time, and reducing your overall debt load.
disasters by getting a sensible loan.
Get the right kind of mortgage
critical to get the right mortgage. You don't want to borrow so much money, for
example, that it's hard to make your monthly payments. A common guideline is to
spend no more than 25% to 30%of your gross monthly income on housing (including
property taxes and insurance). Don't just apply that blindly, though. Consider
your particular situation. How secure is your job and income? Are you carrying
much other debt? Do you have a well funded emergency fund? Are your retirement
funds growing according to a good plan? Buying less home than you can afford
will give you a margin of safety and help you be able to save.
want to get the right kind of mortgage. You might favor an adjustable-rate
mortgage (ARM), for example, for its lower initial rate -- but it's not a great
option if you plan to be in the home for a long period, during which interest
rates (and your payments) can surge. When interest rates are low, as they are
now, fixed-rate loans are generally preferable -- unless you know you won't be
staying in the home long.
15-year mortgage, too, instead of a 30-year one. It will have you paying far
less in interest over the life of the loan -- and you can get a lower interest
rate, too. For example, if you borrow$200,000 at 3.5%, you'll pay about $900
per month over 30 years, but borrowing that at 3% for 15 years can cost you
close to $1,400 per month, but you'd pay less than $50,000 in total interest,
vs. more than $120,000 with the longer loan. You do face steeper monthly payments,
but you save more than $70,000 in total interest. (If the steeper payments
frighten you, consider buying a little less house and borrowing less.)
know that you can reduce your interest rate by paying "points" when
you take out your loan. A point is equal to one percent of your loan. So if you
have a $200,000 mortgage, paying a point would cost you $2,000 -- and it will
typically lower your rate by 0.25 percentage points. Pay two points and you can
turn a 3.75% rate into a 3.25% one. That can be a smart move -- but only if you
plan to stay in the home a long time, long enough to make up in savings what
you paid in points.
Aim to pay 20% down
smart to aim to have a down payment of at least 20% of the value of the home.
Paying less than 20% down on a new home means you'll have to take on an extra
loan in the form of private mortgage insurance (PMI), which will increase your
monthly payment. A low down payment can also result in a higher interest rate.
Another downside of a small down payment is that if home values drop during
your ownership period, you can be left with an "underwater" mortgage,
where you owe more than the home is worth. That can make it hard to sell the
Be able to prepay
make sure that any mortgage you sign up for allows you to make prepayments --
to pay more than you're required to in any month. Prepaying is a powerful
savings strategy, as it can decrease your loan balance much faster than the
original schedule and can save you a lot in overall interest payments. In fact,
if committing to the higher payments of a 15-year loan has you nervous, you
might get a 30-year one but just pay considerably more than you have to each
month. Doing so can turn a 30-year loan into one that's paid off after just 15
or 20 years.
you know about mortgages and the smarter decisions you make when you take one
out, the more you can save. You may well save tens of thousands of dollars!
By Selena Maranjian - To view the original article click