A mortgage is a loan that is used to finance the purchase of real property. There are many different types of mortgage loans; however, fixed rate mortgages (interest rate remains constant or fixed over the life of the loan) and adjustable rate mortgage (interest rate fluctuates with overall market rates) are the most common.
Most people opt for a mortgage loan with a 30 year term; however, shorter term mortgages are available.
Benefits of a Mortgage Loan
There are certain benefits of a mortgage loan that aren’t always applicable to other types of loans:
- The interest may be tax deductible
- As it is a secured loan, the interest rate is generally lower than many other types of loans (however, if you default, you could lose your home)
- The underlying asset may increase in value over the long term rather than decrease in value
How to Save on a Mortgage Loan
If appropriate for your situation, you may be able to save on a mortgage loan by doing the following:
- Making a larger down payment
- Shortening the term of the loan
- Improving your FICO scores (aim for a score over 760 to qualify for the best rates)
- Comparing rates from a number of different lenders
- Cut your PMI
- If interest rates drop, refinancing your mortgage
- Pay off your mortgage quicker
Applying for a Mortgage Loan
Below are the steps I normally follow when taking out a mortgage loan.
1. Save for a down payment
Start saving now for a down payment on your home. A down payment can be a big obstacle to home ownership for many people. You may be able to lower your overall mortgage payment or increase your purchasing power by making a larger down payment.
Different lenders have different standards for how low of a down payment they will accept. Finding ways to cut expenses or increase your income can help you save for a down payment quicker. BillCutterz can help you negotiate lower monthly fees with all of your service providers (i.e. cable, utilities, insurance, etc) at no cost to you.
Keep your down payment in an ultra safe, liquid account, such as an online savings account or money market account that will reward you for keeping your money there. Keep those funds in a separate account so that they don’t get spent on other items.
Private mortgage insurance, or PMI, is generally assessed on borrowers who make a down payment of less than 20% in order to protect the lender. Even if you don’t make a 20% down payment, once you meet certain rules and have paid down your principal enough, you can apply to have your PMI removed.
2. FICO Scores
Pull your FICO scores (the credit score your mortgage lender will most likely be looking at) at least 6 months before you plan on obtaining a mortgage to see how competitive your credit score is.
In general, having a credit score above 760 will allow you to get the best rate on your mortgage, although any score over 700 is pretty decent. If necessary, take steps to improve your credit.
3. Choose Mortgage Loan Type and Term
Figure out what mortgage type and term is most appropriate for you, given your goals and overall financial situation. For example, if you are planning on only having the mortgage for a few years because you plan to pay the loan off very quickly, you may want to accept a slightly higher interest rate if it allows you to lower your loan fees.
4. Get Multiple Quotes
Obtain multiple quotes from different lenders to make sure you find the best deal on your mortgage loan. Not all mortgage providers offer the same rates, and obtaining a lower interest rate on your mortgage loan can save you tens of thousands of dollars over the life of a mortgage.
The interest rate on your mortgage loan will be affected by factors such as your credit and any points you pay. A point is a fee and is equal to 1% of the loan amount and may help to reduce the interest rate on your mortgage loan.
You should take into consideration multiple factors in deciding whether to pay points, including the length of time you intend to stay in the home and how much cash you have available at closing.
When comparing quotes for your mortgage loan, make sure you consider the interest rate, any points, closing costs, if you can lock in the interest rate and any fees for doing so, any prepayment penalties, minimum down payments, and qualifying guidelines.
Additionally, keep in mind that some lenders and governments have special programs for lower income taxpayers and first time homebuyers.
Mortgage loans can be confusing to compare since oftentimes they will have different rates, fees, and points. With quotes in hand, go to your personal financial advisor and have them help you determine which is the best for you if you aren’t comfortable deciding this on your own.
5. Payment Affordability
Once you have found a mortgage loan you like, make sure that you can afford the payments. In addition to paying the principal and interest, home ownership also generally entails paying property taxes, homeowner’s insurance, closing costs, home maintenance, and other expenses you may not have had to pay before if you currently rent. Please, please, please, create a budget and make sure you can afford your payments. Don’t just assume that you can afford whatever a lender is willing to lend to you. If you default on your mortgage loan, you will likely lose your home.
6. Assemble the Paperwork
Begin assembling your paperwork early on to speed up the process. Taking your time to submit your documentation or missing a document or two could really delay the process.
Although standards may vary by lender, many lenders will want to see the last two copies of your tax returns, paystubs, bank statements, and W-2s.
Lenders don’t want to lend to someone who will be unable to repay a mortgage so they will likely consider your income and assets, any outstanding debt, your credit score, and the size of your down payment when deciding whether to lend to you or not.
Additional Mortgage Loan Resources
For additional information on mortgages, check out the below books:
- Mortgage Ripoffs and Money Savers: An Industry Insider Explains How to Save Thousands on Your Mortgage or Re-Finance
- Mortgages for Dummies
What type of mortgage loan do you have? What mortgage tips do you have? Leave a comment below!