Choosing The Right Mortgage

When you buy a house it will be one of the most important purchases you make in your lifetime. This purchase will be with you for 15 to 30 years. The mortgage you choose needs to be the right mortgage and you need to understand the complexity of the endeavor. Your home loan could cost you as much as 25 to 40 percent of your gross income so do your homework before applying for a home loan.

Mortgage Loan Originator for Regions bank, Allison Bird shared her knowledge of lending with me. There are many different types of home loans and things a consumer should look for when buying or building a home.

Know your FICO Score

First, know your FICO score. Developed by Fair, Isaac & Co., a FICO score is a credit score which is extremely important to your loan. This score was pioneered in the late 1950’s and has become used by all lending agencies in determining your loan rate. The score tallies the borrower’s credit history into a single number. Good credit can get you a lower rate saving you thousands of dollars over the life of the loan. According to Ms. Bird, “Credit scores can affect the rate in many cases, on a conventional mortgage there maybe a slight increase for scores below 720 and increase slightly with every 20 point drop. FHA rates increase when a credit score falls below 620.”

Next, get pre-approved or pre-qualified for your home loan. This benefits both the buyer and the seller. You will know how much you can afford and what your payments will be and the seller may take your offer quicker if they know it is a done deal. So what is the difference in Pre-qualified and Pre-approved?

Pre-qualified

Pre-qualified happens when a buyer meets with a mortgage lender and gives them all of their information like income, expenses, assets and liabilities and the broker will give them a letter stating an opinion of what the buyer can afford.

Pre-approved

Pre-approved happens when there has been written evidence of all of your income, expenses, assets and liabilities. Your credit has been checked and approved from the lender. The buyer can close easily as it has all been pre-approved.

Should you lock in your rate?

Rates can change daily so you need to know if rates are going up or down. If they are going up you want to lock in your rate. This means when you close your rate will not change. The average time for a locked rate is 30 days but you will find some are from 15 to 60 days. Once you lock your rate make sure you close before the contract expires. If rates may go down you may not want to lock in your rate but some lenders offer what they call a “float down” which is an option that will give you a lower rate if the rate falls. If you do have a floating lock be sure and watch the market to see if the rate has lowered.

Money Down

The minimum down payment for a new home loan or construction loan will be between 3% - 5%. Know how much house you can afford before building or buying.

Insurance

All mortgage lenders will make you provide insurance for the home and the amount of your home loan. Shop for home insurance before you are ready to close. If you wait until the last minute you will not have time to shop around and may end up paying more than you have to.

Points

What is a point and what does it have to do with my mortgage?

Well consumers can buy points to lower their interest rate. You need to do your homework to see if it is the right economical thing to do for your loan.

Discount points are fees paid to a lender at the closing and the cost of each point is equal to one percent of the loan amount. For example, for a $100,000 loan, a discount point will equal $1,000. Each discount point on a 30 year loan usually lowers the interest rate by 0.125 percent. If your rate is 6.5 percent by purchasing one point it would be lowered to 6.375 percent.

Mortgages

The safest mortgage for consumers is the traditional fixed rate mortgage. This type of mortgage has a fixed rate that will not change over the life of the loan. The fixed rate you received for the life of your loan is determined by the mortgage industry. Rates can change daily, so Ms. Bird advises, “The best way to find the going rate is to contact local mortgage lenders and ask.”