If you’ve got questions about mortgages, you stand in good company. Mortgages are bewildering, whether you’re a first-time homebuyer or not. This roundup will answer how you can negotiate the best mortgage rates, whether you should take out a short- or long-term loan, whether you’ll need private mortgage insurance and more. For questions specific to your finances and how your mortgage fits into your overall financial life, a financial advisor may be able to help.
1. Are Mortgage Interest Rates Negotiable?
Absolutely. Always compare rates from different lenders, and don’t be afraid to ask one lender to match a lower rate from another bank. That said, the best way to secure the best interest rate is by cleaning up your finances before you apply for a mortgage.
A FICO score of 760 or higher can usually help you get favorable rates for conventional loans. But if your score falls short, don’t sweat it. There are plenty of ways you can improve your credit score , though they may take some time. For example, if your credit card debt is weighing your score down, consider trying to transfer your balance to a card with a 0% interest period that can span up to about 18 months. This will allow you to pay off the transferred balance faster, thereby improving your credit score.
2. What’s the Difference Between a Fixed-Rate and an Adjustable-Rate Mortgage?
With a fixed-rate mortgage, you agree to make payments at a set interest rate for the life of the loan. With an adjustable-rate mortgage, as the name suggests, the rate fluctuates. Usually, you pay a low introductory rate for five or seven years, and after that, the rate, pegged to an index like the prime rate, can rise (or dip) every year.
Lenders offer both rates on loans that are 15- or 30-year terms. Compared to the traditional 30-year mortgage, a 15-year home loan has higher monthly payments, but you’ll end up paying less in interest over the life of the loan. If you’re not planning to be in the home for a very long, it’s probably not worth the higher monthly payments for a 15-year term. But if you’re planning on staying in the home for a long time, a 15-year mortgage could be a better option if you can afford the bigger payments.
3. Will I Need Private Mortgage Insurance?
If your down payment is less than 20% of the home value, you’ll need to pay private mortgage insurance (PMI) on top of your monthly mortgage payments. But once you’ve paid the mortgage balance down so that you have at least 20% equity in your home, you may request cancelling PMI. By law, the mortgager servicer must remove PMI when the mortgage balance falls to 78% of the home’s appraised value when you bought it.
4. What’s the Difference Between Prequalifying and Preapproval?
To prequalify you for a mortgage, a lender runs a quick check of your income and assets. Many real estate brokers and sellers require that you have this before showing you a home or considering your bid.
But being prequalified doesn’t mean the bank is ready to hand over a loan to you. That comes following mortgage preapproval. Getting preapproved is a lengthier process, where the lender takes a deep dive into your financial and credit history.
It will typically review the last two years of your income and any self-employment income. The lender will also take into account all of your assets, including savings accounts, certificates of deposit (CDs) and retirement plans like 401(k)s and individual retirement accounts (IRAs).
Additionally, the bank will look at your debt and how good you’ve been at making your payments. So if you have a lot of debt or have not been sending in your payments regularly, you may want to improve either situation before you go mortgage hunting, even if it takes some time. The reward would be an improved credit score, which can help you secure a loan rate and terms.
But you’re going to need to submit a lot of paperwork and information to get preapproved for a mortgage whether you’re doing it online or in person. To help, we’ve developed a mortgage preapproval checklist.
5. How Much Home Can I Afford?
Bank actuaries take into account a number of factors, including your debt-to-income ratio and monthly debt payments. But one thing that may not figure as prominently in their calculations as it should is your actual cash flow. So even if you qualify for a hefty enough loan to buy your dream home, you may not truly be able to afford it. And biting off more than you can chew can lead to foreclosure, of course, and seriously harm to your financial future. To make sure you’re looking at homes in your ballpark, use our how much house can I afford? calculator.
6. What Are Mortgage Points?
The idea behind mortgage points is that if you pay a little more upfront, you can lower your interest rate a bit. Each point usually costs 1% of the mortgage value and knocks 0.25% off your interest rate.
7. Can I Prepay My Mortgage If I Have Extra Money?
You can as long as your mortgage doesn’t have a prepayment penalty. Though some prepayment penalties kick in only if you pay off the entire loan early, say, if you sell the house. So you may be okay chipping away at the principal balance with small extra amounts. To know for sure, read the fine print on the closing disclosure form. Ideally, you should do this before you sign, so if you don’t like the terms, you can ask to have the penalty remove. This may affect your mortgage terms, though.
8. What Do I Do If I’m Falling Behind on Mortgage Payments?
Get on the phone with your mortgage lender and explain your situation. If you’re experiencing a job loss, health crisis, bereavement or other hardship, you should be able to negotiate what’s called temporary mortgage forbearance. This will allow you to temporarily lower–or even suspend–your monthly loan payments.
9. Can I Get a Mortgage With a Low or No Credit Score?
You may not qualify for a conventional mortgage. But you may be able to get a loan through the Federal Housing Administration (FHA) if you are a first-time buyer and meet its other requirements.
People with credit scores as low as 580 are eligible for FHA loans. If your score is even lower, at 500, you may still be able to get a loan if you can make a 10% down payment. The FHA doesn’t issue these loans directly. Regular banks and lenders do. But the FHA backs them. This means that in the event you default, the government has your lender’s back. This is why lenders feel safe loosening up credit and income requirements for these loans.
Don’t even have a credit score? Believe it or not, you can still secure a mortgage if you can show that you have had non-conventional forms of credit and paid off all your debt. In this case, some lenders may agree to put you through a process called manual underwriting. If they do, getting approved for a mortgage may take a bit longer.
10. How Do I Choose Between the Different Government Loan Programs?
It depends on your circumstances. If your finances are less than stellar, FHA loans may be better for you. And if you don’t even have sufficient funds for a down payment a down payment, a VA loan may offer the most favorable terms. Learn more about each in our guide to first-time homebuyer programs.
Mortgages are complex, so it’s normal to have a lot of questions. In fact, once you understand the basics from reading this article, you’re bound to have more questions related to your specific situation. Be sure to get them answered before signing any loan forms.
Tips for Getting a Mortgage
- Check your credit score before applying for prequalification. If it’s lower than you expected, make sure there aren’t any errors. They do happen.
- Shop around and always compare mortgage rates.
- Don’t take the seller’s word for the value of the home you’re trying to buy. Look up the closing prices on houses in the area, and only offer what’s in the same ballpark. This will improve your chances of your loan getting approved.
- Seek professional advice if you are not confident going it alone. Our SmartAsset financial advisor matching tool can help you find someone you can trust in your area. Simply answer a few questions, and our matching tool connects you with up to three local advisors.
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