You and your mortgage might be together for years, so you will want to get the best one around. Finding your perfect match takes more than just choosing the one with the lowest interest rate. There are other factors — and fees — to consider. Before you sign on the dotted line, make sure you know what to look for.
A variety of mortgages are available on the market, but two types are the most common: fixed-rate and adjustable-rate. A fixed-rate mortgage has the same interest rate through the life of the loan. Fixed-rate mortgages eliminate surprises, which is good if interest rates rise; but if interest rates fall, you’ll be stuck with the same interest payment.
An adjustable rate mortgage typically starts with a lower short-term interest rate. After the initial period ends, your rate will fluctuate throughout the rest of the loan. An adjustable-rate mortgage can be a gamble. If interest rates are low, you’ll pay less, but if interest rates rise, you could end up paying more each month.
While 30-year mortgages are the most common, you have the option of considering mortgages with shorter pay-back periods of 10, 15 or 20 years, among others. You’ll pay much less interest over the life of these shorter-term loans, but your monthly payments will be higher than with a 30-year mortgage. There may be tax advantages to a 30-year mortgage as well. You could also choose a 30-year loan and, if you’re disciplined, pay it off early. Making this decision depends a lot on where you are in your life, and how you want to manage your investments. (For more, see Do You Need a 30-Year Mortgage?)
When looking for a lender, don’t settle on the first company to offer you a mortgage. Interest rates and fees can vary widely between lenders, and you’ll need to comparison shop to make sure you’re getting the best deal. To simplify the process, use an online tool such as realtor.com®’s Get a Mortgage Quote to see offers from dozens of lenders.
Interest rates vary depending on current market conditions, economic factors and your own background. Generally, if you have a steady job and a high credit score, you’ll qualify for the best rates, but if you have a few blemishes on your credit report, you’re considered to be a higher risk and may only qualify for a higher interest rate. Different lenders may also offer you different interest rates.
To get an idea of how different interest rates will affect your loan amount and monthly payment, try the Loan Comparison by Rate calculator.
Interest isn’t the only extra you’ll pay with a mortgage. Many lenders also tack on additional fees. Often known as junk fees, these include charges for things such as loan processing or loan administration. You may not be able to get around these fees entirely, but you can save yourself money by comparing the fees across several lenders.
Private Mortgage Insurance
When you buy a house the amount you put down is considered the equity (or stake) you have in the house. If you do not have a large down payment, you won’t have much equity in the house, which lenders consider a higher risk. To protect themselves in case you default on the loan, most lenders require that you pay an additional fee known as private mortgage insurance.
PMI can add several thousand dollars to the cost of your loan. To avoid it, you’ll need to put at least 20 percent down. If you have to pay PMI, discuss the total cost and payments with your lender. PMI varies depending on your loan size and terms, so you may save money with a different loan.
Finally, keep in mind that offers from lenders have a time limit, known as the lock period. During this time, the interest rate is locked in. However, if you go past the lock period, your interest rate could be higher or lower depending on current forecasts. To keep from losing your preferred interest rate, you’ll have to close within the lock period.
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