There are a number of things that go into the mortgage rate you are likely to be offered. These include things like the kind of mortgage sought, the details of your credit report and the size of the down payment you can bring to the table. If you are working with a realtor, it is likely that you will be pushed in the direction of that person’s preferred home lender, no matter if this is to your financial benefit or not.
The interest rate on a loan is the amount per year that will have to be paid to finance the principal amount. A low rate is obviously going to be the most attractive. Loans with shorter durations cost less in overall interest, which is a key consideration to keep in mind.
A mortgage point is essentially an amount of loan interest that is paid in advance. One mortgage point represents one percent of your overall loan amount. Therefore, if you have borrowed $300,000, a single point will cost $3,000. Lots of lenders offer lower rates of interest to those willing to pay points. Therefore, if you pay more money on the front end, you can reduce your monthly mortgage obligation.
These are amounts tied into the various tasks that need to be done for a mortgage loan to be granted. Such details include things such as obtaining credit reports, conducting property appraisals, securing title insurance, transfer fees, escrow fees and the like. Reputable lenders will have no problem providing a good-faith estimate of the total amount in closing costs in order to prevent the borrower from having an unpleasant surprise when it is time to do the deal.
The fact is that credit scores are used by lenders to assess your reliability. Higher scores lead to lower interest rates. Boosting credit scores can be a time-consuming and frustratingly long process, but doing the work necessary is more than worthwhile. The savings you realize in mortgage interest alone will justify the headaches.
To illustrate the point, consider a scenario generated through the myFICO mortgage calculator. If I were to finance a home in North Carolina by borrowing $300,000 with a credit score above 760, my monthly payment could be as low as $1,370 per month. With a score of 680 or so, I would have to pay about $1,438 each month, because of a higher interest rate. If my credit stood at around 620, I would possibly have to pay roughly $1,653 every month. With the later situation, I would end up paying an additional $102,000 in interest throughout the loan, just because of my credit score.
It can be challenging to muster the discipline required to save up a sizable down payment on a home. However, doing so makes a massive difference in your mortgage rate and the overall amount of money you can save. Besides, having a large down payment can prevent the need for mortgage insurance.
Another illustration can help illustrate the point. If I were to purchase a $200,000 property in Nashville by putting down 20 percent ($40,000), I could have a monthly payment of around $730. This figure is dependent on a good credit score. If I only put down $25,000 or the equivalent of 12 percent, my monthly payment would rise to about $823. I would also have to pay an amount each month for mortgage insurance, bringing the obligation each month up to about $883.
If the property you are buying is only likely to be your home for a short period of years, it may be wise to go with an adjustable rate loan. These mortgage products feature low-interest rates for the initial few years but could have a sharp escalation in rates after a stated time period. Lots of buyers have done well for themselves by utilizing the low initial rate to buy a home and then selling the property prior to the scheduled increase.
If you feel you are too risk-averse to consider an adjustable rate, think about obtaining a fixed rate loan that has a shorter loan term. The monthly obligation will be higher, but your interest rate will be far more advantageous. As such, you will pay less overall for the loan, and you will acquire equity at a rapid pace.
Prodigy Lending is a DBA of AmCap Mortgage, Ltd. (NMLS ID# 129122 – www.nmlsconsumeraccess.org/EntityDetails.aspx/COMPANY/129122), an Equal Housing Lender.
Managing RMLO: Jason Turner (NMLS #286357)