Purchasing a home usually means that you are going to have to consider all of your financial options. The most common one is using a mortgage to finance the purchase. If you want to find the perfect property for your home business, for example, having a good understanding of mortgage rates will be essential. Luckily, these days, you can find the best mortgage rate online, with the help of many readily available tools. But before that, there is some preparation to be done. There is also the need to understand all the different types of rates. This article is going to provide you with all the information you need to make the best decision.
Tips for finding the best mortgage rate
First things first, here are the three things you need to figure out before searching for the best mortgage deal:
- Prepare early
- Understand PMI
- Interest rate
The first thing that you will need is an impeccable credit score. Lenders will only take your case into consideration if your score is at least 700. However, having it around 750 or (740 at minimum) is advisable. By making sure that your credit score is up to par, you will ensure that you get a good deal. Start by paying off any outstanding balances or debts as soon as you can and work from there.
You may even want to consider renting a place out while you get your score under control. Renting has its pros and cons, but in this case, it might be highly beneficial to your situation. Don't be afraid to spend a bit of money in order to save more later, as even a small point difference in your score could mean thousands of dollars in interest.
The second thing that you need to do is save up as much money as you possibly can. The more payment you can put down, the lower the mortgage rate will be. It can even reduce the interest rate, saving you a lot of money in the long run. If you can afford to make a 30% down payment, your interest will drop considerably, as much as 1% in some cases.
Understand PMI to find the best mortgage rate
However, in case you are unable to meet the conventional 20% down payment, you will most likely need to deal with PMI (Private Mortgage Insurance). As you are considered a higher risk prospect (due to not being able to shell out that 20%), most lenders will require you to carry PMI to provide the loan. Now, the problem with it is that the insurance itself can cost anywhere between 0.5% and 1% of the entire amount, per year.
If you absolutely must go with PMI, you need to cut down on all other costs to minimize its effect. For example, you may want to do your own packing instead of hiring professionals. Avail yourself of packing tips for beginners and roll up your proverbial sleeves; there's money to be saved! Or you may want to cut down on your wardrobe fund; anything that saves you money, really.
Your ultimate goal is to get rid of the PMI as soon as possible. And for that, you are going to have to be regular with your payments and earn enough equity in your home. As soon as you are eligible for the removal of the insurance, go for it.
The interest rate is usually what most homeowners stress about. Yes, it is quite important, but it is not the be-all and end-all. There are a few more factors to consider. Are you going to incur a prepayment penalty if you later decide to refinance? How much are the closing costs, in total? These costs range anywhere from $3000 to $7000 for a $150,000 home, so it is in your best interest to figure out the exact charges. When dealing with lenders, you really need to look at the entire print and all the costs, not just the interest rate.
Types of mortgage rates
There are three major types of mortgage rates. The one that you receive from a lender will depend on your credit score, debt-to-income ratio, and employment history. The rates themselves are called:
This is the rate that everyone wants. To qualify for this rate, you need to have a credit score of at least 740, and your debt-to-income ratio needs to be lower than average. This type meets FNMA's (Federal National Mortgage Association) quality standards and features a standard amortization schedule.
You will also be required to make a down payment of 10-20% on the home. Eligible candidates will enjoy an interest rate of around 4.5% for a 30-year mortgage deal, due to their exceptional debt/income ratio and credit score. By managing to get this type of mortgage, you will save several tens of thousands of dollars during the course of the loan. It literally pays off to work to get this option, as you can spend the extra money to personalize your space in your new home. With the funds you are going to be saving, it is going to be entirely possible!
This is the rate for those of us with a lower credit rating. Anywhere below 640 and suddenly, you're looking at an 8 or 10 percent interest rate. Even worse, you are most likely going to have to accept an adjustable-rate mortgage deal. This means that your rate is going to be fixed in the first two years, after which it is readjusted and is often quite higher.
This type is the middle ground. You will need a credit rating of at least 700 in order to get it. The interesting thing about this type is that you can have very little in the way of documentation (or none in some cases) for your income, expenses, or assets. The interest rate for Alt-A mortgages is between 5.5% and 8%.
How to get the best possible mortgage deal?
In a nutshell, shop around. If you want to find the best mortgage rate, you will have to visit as many lenders as you can. Try to find lenders that will give you the prime rate if anyhow possible. Don't be disheartened if a few of them do not; that does not mean that you will not qualify at the next. And always remember, a measly 1% interest rate difference is a HUGE deal, easily worth tens of thousands of dollars.