Buying on a Budget: How to Get the Best Deal on Your Mortgage
Tips For Buying A Home On A Budget
When you’re making a purchase as large as a house on a budget, even small savings can add up to something big over time. Most people are familiar with the ways to get a deal on a house—shop at the right time, use the inspection results to haggle with the seller, don’t forget about foreclosures, etc. But we see otherwise budget-savvy buyers slip up all the time when it comes to financing.
There are plenty of ways to save, so long as you know where to look. To get the best deal on your mortgage, take a look at these tips we usually only share with Total Mortgage borrowers.
Know how much you can afford
The first thing you should do, before you even start looking for homes, is to get preapproved by a lender. This may seem kind of premature, but if you’re serious about buying, it’s a must. Getting preapproved can help make your offers look more attractive to sellers, since financing falling through is one of the top reasons a buyer has to back out of a deal. Preapproval also helps give you an idea as to how much you can borrow from a lender.
There’s a catch to the latter part, though. While lenders do take into account major factors like income and debt levels, they often don’t factor in smaller but constant costs—like daycare, gas, and insurance—that can really cut into your paycheck. To make sure your home-buying budget is accurate, use your preapproval as a starting place for your own math.
Pick the right mortgage
While a 30-year fixed rate loan is standard for good reason (it allows people to lock in a lower rate for the full term and offers a lower monthly payment), it isn’t right for everyone. Here are a few other popular options that may save you money, depending on your circumstances:
15-year fixed. For those who maybe bought a smaller house than they could have afforded, a 15-year term can save thousands (in some cases, tens of thousands) in interest over time. The tradeoff here is that the monthly payments will be larger than with a 30-year term, but since you borrow the money for a shorter time, you pay less interest.
ARMs. For those buying a starter home or expecting to move in a few years, an adjustable rate mortgage (or ARM) can be perfect. ARMs typically start out with an initial fixed-rate period, the length of which you choose when you get the loan. After that period, the rate usually adjusts each year, but is constrained by a pre-determined “cap.” The great part of these loans, though, is that initial fixed period, which comes with a super low interest rate compared to many other loan options.
FHA. For buyers with lower credit scores or less money to put down, loans backed by the Federal Housing Administration (or FHA loans) can mean the difference between buying that house now and waiting until your circumstances change. They also allow you to make a down payment as low as 3.5% of the loan amount, which can be great for those without a lot of liquid assets.
There is one downside though. With FHAs, you will need to pay private mortgage insurance for the length of the loan, no matter how much equity you build over time – unless you can put at least 10% down, in which cases the rules become more relaxed.
Know that there’s no such thing as no closing costs
Some lenders advertise a no or low closing cost option hoping to snag budget buyers who won’t read the fine print. Lenders, however, can’t actually afford to wave closing costs. Instead, they typically increase the interest rate to compensate or they roll the costs into the loan amount.
This can be a good option for buyers who simply don’t have the cash on hand for closing costs and know the situation going in, but if that doesn’t describe you, then you would be better off avoiding lenders who try to hook you with these claims.
Many buyers make the mistake of assuming that since the Federal government regulates the mortgage industry, mortgage interest rates are going to be more or less the same everywhere. This couldn’t be further from the truth. Banks, lenders, and brokers can all use different business models, which means that rates can vary multiple tenths of a percentage point from shop to shop.
That may not seem like much, but since mortgages involve such large sums of money, even small differences of .1% or .2% can mean you’re stuck paying hundreds or thousands more, depending on the size of your loan.
To make sure that you get the best deal possible, try to get at least two or three rate quotes before you settle on a lender.
Improve your credit
Another thing many buyers fail to realize is that the mortgage rates lenders advertise are not always the ones that they will be quoted in your specific scenario. This is because your actual interest rate will take into account a variety of personal factors, like credit score and debt-to income ratio. Advertised rates, meanwhile, usually assume a best case scenario.
In order to get a lower rate that could save you money in the long run, you need to get as close to that best case scenario as possible. One of the best ways to do this is to get your credit score as high as possible—preferably into the mid- to high- 700s. Here are some basics for getting there:
Pay your bills on time. Lenders don’t like to see that you have trouble making payments on time.
Pay off your balance. The more available credit you have, the better your score. So start chipping away at your balances, and once a card is paid off, don’t close it right away. This could actually cause your score to drop, since it lowers your available credit.
Dispute any errors. Mistakes happen all the time, but you don’t want them affecting your credit score. Check your credit report and question anything that you don’t recognize.
The bottom line
Ultimately, there are all kinds of ways to save on your mortgage, as long as you’re willing to put a little time and effort into doing the right research and checking all of your math.
Other Top Mortgage Resources
- Buying A Home With Little or No Money Down via Rochester’s Real Estate Blog
- 4 Ways A Loan Officer Can Work Better With Real Estate Agents via MGIC
- Top Articles & Resources Regarding Mortgages & Home Financing via Bundlr
This post was provided by our friends from Total Mortgage Services:
For over 15 years, Total Mortgage Services have combined the personal service and accountability of a local lender with the low rates and product selection of one of the big guys.
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