You’d think that, by now, we all know everything that we need to know about mortgages. When you’re buying a home or refinancing one, they are such an important part of what your monthly household expenses. As you’re going through the process of securing a home mortgage, you should keep in mind that lenders are trying to assess your risk of repaying the loan through maturity. Given the loan repayment objective for lenders, they are looking for information about you that will help them assess your risk profile as a potential borrower. Here are some things you didn’t know about mortgages and which you should keep in mind.
1. You can save a lot of money with a shorter term loan.
Most mortgages have 15- or 30-year terms and fixed rates. Every online mortgage calculator will show you that the longer the mortgage, the more you spend. So, if you can afford the monthly payments, you should always opt for a shorter term mortgage.
2. A bi-weekly payment schedule is a good money saver.
Bi-weekly payments are an alternative to monthly payments. Some banks allow and even encourage them. Studies have shown that, with a bi-weekly payment, you can shorten your a 30-year loan term by 49 months. This will, in turn, save you money.
3. Mortgage rates change constantly.
It’s generally best to compare mortgage rates because many people believe that the mortgage rate you see today will be around for another week, or even for a month. However, the mortgage market is fluid and influenced by a variety of events. Rates change often – even throughout each day and can spike or drop unexpectedly at any time. Further, different lenders can offer different rates and fees at the same time. As you’re going through the process of purchasing or refinancing your home, you’ll want predictability of your monthly home-related expenses and therefore can “lock in” an interest rate at the time of the application or when getting pre-approved for a mortgage.
4. If you’re self-employed, be prepared for possible roadblocks.
Since lenders tend to put an emphasis on income predictability, it can be more difficult for self-employed borrowers to qualify for a mortgage. For one thing, many self-employed individuals (legally) deduct a large portion of their income, so the income figures on their tax return can be somewhat misleading. And income and employment history standards tend to be more rigid when it comes to the self-employed.
5. Good credit can save you thousands.
To be perfectly clear, you can get a mortgage without great credit, if your income, employment, and other factors justify the loan. The minimum FICO score required for a conventional mortgage is 620, and you can obtain an FHA loan with a score in the 500s. As we mentioned earlier, lenders are trying to assess the borrowers risk profile, and they will penalize potential borrowers which they see as “risky” with higher interest rates.
However, good credit can save you thousands of dollars in interest over the term of the loan. Let’s say you’re in the market for a $250,000 30-year fixed-rate conventional mortgage. Based on today’s average mortgage rates by credit score, here’s how much you can expect to pay.
As we already know, the best way to save money is to shop around and get as many quotes as possible. A mortgage broker can help you do that without you having to waste any of your own time. Not to mention that you’ll also get help with the paperwork and other things that you need to set in order before getting approved for the loan.
Buying a home and getting a mortgage are two of the biggest financial decisions most of us will ever make. That’s why it’s so important to know everything about mortgages, absolutely everything.