Your home is likely to be the largest purchase you make during your lifetime. As such, it requires careful financial planning. Your choice of mortgage will likely impact your finances for many years to come. Fully understanding your options and the variables involved is part of sound financial planning for your family.
Maximize Your Financial Strength Before Shopping
Before applying for any kind of credit, it is a good idea to know your credit score and do what you can to raise it as much as possible for the best possible loan terms.
- If you notice errors in the report, dispute them. The Federal Trade Commission (FTC) provides a simple guide for disputing credit report errors. After receipt of your dispute letter, the bureaus have 30-45 days to investigate and correct errors, so take this step well before you need to apply for a loan.
- Avoid applying for new credit shortly before shopping for your mortgage. Additional inquiries negatively affect your credit score.
- Put off closing old credit accounts that you have not used in a while. Closing accounts reduces your available credit, which can also lower your score.
Because your home is likely to be the largest purchase you make, the impact of your credit score on the terms of the loan can have much more profound effect on your long-term finances than other credit arrangements you may have. As a result, being in control of your credit score before taking out a mortgage is vital to your long-term financial health.
Shop Several Lenders and/or Brokers
Many variables go into the total cost of any home loan. For the best possible deal, you will need to visit multiple lenders and/or brokers to compare prices and loan features. Keep an eye out for the following costs:
- Brokers offer the advantage of comparing the costs from multiple lenders for you. If you deal with brokers, however, ask how they are compensated for their work. This may come in the form of points paid at closing and/or an add-on to your interest rate.
- Look at each line item included in closing costs. They may include origination, underwriting, escrow, legal, title insurance, and other fees. Be sure to ask for clarification on any fee you do not understand so you know what it includes.
- Understand your rates.
- Fixed-rate and adjustable-rate mortgages have different long- and short-term costs associated with them. If you go with an adjustable-rate mortgage, then ask how your monthly payment may be affected by interest rate fluctuations.
- Look at the difference between the interest rate and the APR. The APR can include costs such as points, broker fees, and other credit charges.
- Understand your down payment and mortgage insurance (PMI) costs. If you plan to put less than 20% down on your home, then you can expect to add PMI costs to your monthly mortgage payment. Make sure you understand what the additional cost will be and how long you will have to pay it.
- Take the time to research programs that can help to lower the cost or improve the terms of your home purchase.
- Understand any points that you will be paying in terms of actual dollar amount. If you are considering buying discount points, compare the amount you would be paying for them to the length of time it will take you to recoup that value in lower monthly payments.
- Compare the loan packages offered by the various lenders and/or brokers you consult. Understand that different prices may be offered for the same terms to equally qualified borrowers. The difference between the lowest available price and any higher price is generally “overage.” This overage can be expressed in points, fees, or interest rate, and can often be kept by a broker or loan officer as additional compensation. You can negotiate with lenders by asking if any of these costs can be lowered. Just make sure that another cost is not being raised at the same time to compensate for it. This will allow you to narrow in on the best deal you can get.
The FTC provides a handy mortgage shopping worksheet to help consumers effectively compare the terms of various loan packages.
Boelman Shaw Capital Partners offers our Des Moines area clients comprehensive financial and tax planning services. For advice on financial planning for purchasing a home or any other life event, including retirement, college expenses, or providing for a growing family, give us a call.
Material discussed herein is meant for general illustration and/or informational purposes only. Because individual situations will vary, the information shared here should be used in conjunction with individual professional advice.