How to Get a Better Deal on a Home Loan
Watch interest rates., Speak with different lenders., View adjustable rate mortgage (ARM) strategically., Consider paying for points., Consider the life of the loan., Know the questions to ask yourself.
Step-by-Step Guide
-
Step 1: Watch interest rates.
The easiest way to get a lower rate is to wait until the interest rates on loans across the board are at low levels.
Interest rates fluctuate a great deal, sometimes even during the same day, but there are times when they are simply lower than at other times.
Sometimes periods of low interest rates also see increased home prices, so keep this in mind.
You can speak to your bank, lender, or broker about current interest rates on loans and ask their opinion about if now is a good time to buy. -
Step 2: Speak with different lenders.
Mortgage rates for the same person can differ widely from lender to lender, so explore your options.
Talk to different banks, credit unions, and brokers in your area.
If you belong to a credit union or if you've been with a bank for a long time, you'll often find your best rates there, though it's still a good idea to check around.
A mortgage broker, who sifts through many lenders, may be able to find you the best rate.
On the other hand, a lender like a credit union may not have to cover as much overhead as a broker and you could find lower rates with them., Mortgages generally come in two flavors: with fixed or adjustable interest rates.
Fixed rates lock the borrower into a consistent interest rate that the borrower pays throughout the course of the loan.
The part of your mortgage payment that goes toward principal and interest remains the same, though insurance and taxes may fluctuate.
With an adjustable rate mortgage (ARM), the interest charged fluctuates during the life of the loan.
You begin with an introductory period of ten, five, or even one year where the interest rate is locked in (usually at a pretty low rate, which is what attracts people to this type of loan), and then after the introductory period your interest is calculated based on a standardized index such as the “prime rate.” While you may like the idea of a low introductory interest rate with an ARM and even though there is a cap on how high the interest rate can be raised,be aware of the chance that your interest rate will rise in the future and increase the total cost of your loan.ARMs aren’t very beneficial today with interest rates at historic lows.
They’re not necessarily a bad thing, though.
For the right borrower – for example, someone who won’t stay in the loan long enough to see an adjustment – they can be used as a smart, strategic tool. , In banking terms, a point is an upfront fee equal to 1% of the total mortgage amount that you’d pay in order to lower the ongoing interest rate by a fixed amount (usually
0.125%).
A lender can also use negative points – in other words reduce their fees in exchange for a higher ongoing interest rate.
Paying for points usually makes sense if you plan to keep your loan for a long time because you’ll end up with a lower ongoing interest rate.Try to calculate the break-even or “recapture” point.
For example, say you’re borrowing $150,000 for 30 years and the prime rate (the rate that doesn’t cost you any points or provide any credit) is 4%.
To get to
3.875% the lender will charge you 1 point, which would be $1,500.
Your monthly payment would then go down by $11 per month.
Now calculate the break-even by dividing $1500 by $11 =
136.36.
This means it will take you 137 months of payments to recapture your initial cost of $1,500 to lower the rate. 137 months is about
11.5 years.
Once you have this number, you have to determine if you’ll stay in this mortgage that long.
If not, the points are not worth it.
If you will, they might be, but first you need to determine the time value of the money. , The most common loan terms are 30-year (lowest monthly payment), 10-year (highest monthly payment), and 15- or 20- year (between the two).
Even though the 30-year plans have the lowest monthly payments, you pay more in the long run because interest rates are higher for longer loans.
You will get a better deal by taking out a shorter loan because you are paying less in interest, so you should consider how much you can comfortably pay each month and see if a mortgage shorter than 30 years is possible for you., Ask yourself the following questions when determining which loan offer to take after you have shopped around:
Is the interest rate fixed or adjustable? Do I need to pay points or are there other fees with the loan? What is the term of the loan? How much will my payment be? Are there other costs such as broker and title search fees that will be attached to the closing costs? May I repay the loan early without penalty? Will the payments change over the life of the loan? How high can it go? How much do I need to put down? Does the written offer match what I was told about the loan? -
Step 3: View adjustable rate mortgage (ARM) strategically.
-
Step 4: Consider paying for points.
-
Step 5: Consider the life of the loan.
-
Step 6: Know the questions to ask yourself.
Detailed Guide
The easiest way to get a lower rate is to wait until the interest rates on loans across the board are at low levels.
Interest rates fluctuate a great deal, sometimes even during the same day, but there are times when they are simply lower than at other times.
Sometimes periods of low interest rates also see increased home prices, so keep this in mind.
You can speak to your bank, lender, or broker about current interest rates on loans and ask their opinion about if now is a good time to buy.
Mortgage rates for the same person can differ widely from lender to lender, so explore your options.
Talk to different banks, credit unions, and brokers in your area.
If you belong to a credit union or if you've been with a bank for a long time, you'll often find your best rates there, though it's still a good idea to check around.
A mortgage broker, who sifts through many lenders, may be able to find you the best rate.
On the other hand, a lender like a credit union may not have to cover as much overhead as a broker and you could find lower rates with them., Mortgages generally come in two flavors: with fixed or adjustable interest rates.
Fixed rates lock the borrower into a consistent interest rate that the borrower pays throughout the course of the loan.
The part of your mortgage payment that goes toward principal and interest remains the same, though insurance and taxes may fluctuate.
With an adjustable rate mortgage (ARM), the interest charged fluctuates during the life of the loan.
You begin with an introductory period of ten, five, or even one year where the interest rate is locked in (usually at a pretty low rate, which is what attracts people to this type of loan), and then after the introductory period your interest is calculated based on a standardized index such as the “prime rate.” While you may like the idea of a low introductory interest rate with an ARM and even though there is a cap on how high the interest rate can be raised,be aware of the chance that your interest rate will rise in the future and increase the total cost of your loan.ARMs aren’t very beneficial today with interest rates at historic lows.
They’re not necessarily a bad thing, though.
For the right borrower – for example, someone who won’t stay in the loan long enough to see an adjustment – they can be used as a smart, strategic tool. , In banking terms, a point is an upfront fee equal to 1% of the total mortgage amount that you’d pay in order to lower the ongoing interest rate by a fixed amount (usually
0.125%).
A lender can also use negative points – in other words reduce their fees in exchange for a higher ongoing interest rate.
Paying for points usually makes sense if you plan to keep your loan for a long time because you’ll end up with a lower ongoing interest rate.Try to calculate the break-even or “recapture” point.
For example, say you’re borrowing $150,000 for 30 years and the prime rate (the rate that doesn’t cost you any points or provide any credit) is 4%.
To get to
3.875% the lender will charge you 1 point, which would be $1,500.
Your monthly payment would then go down by $11 per month.
Now calculate the break-even by dividing $1500 by $11 =
136.36.
This means it will take you 137 months of payments to recapture your initial cost of $1,500 to lower the rate. 137 months is about
11.5 years.
Once you have this number, you have to determine if you’ll stay in this mortgage that long.
If not, the points are not worth it.
If you will, they might be, but first you need to determine the time value of the money. , The most common loan terms are 30-year (lowest monthly payment), 10-year (highest monthly payment), and 15- or 20- year (between the two).
Even though the 30-year plans have the lowest monthly payments, you pay more in the long run because interest rates are higher for longer loans.
You will get a better deal by taking out a shorter loan because you are paying less in interest, so you should consider how much you can comfortably pay each month and see if a mortgage shorter than 30 years is possible for you., Ask yourself the following questions when determining which loan offer to take after you have shopped around:
Is the interest rate fixed or adjustable? Do I need to pay points or are there other fees with the loan? What is the term of the loan? How much will my payment be? Are there other costs such as broker and title search fees that will be attached to the closing costs? May I repay the loan early without penalty? Will the payments change over the life of the loan? How high can it go? How much do I need to put down? Does the written offer match what I was told about the loan?
About the Author
Barbara Brown
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