What You Didn’t Know About Home Loans
A home loan, otherwise known as a mortgage, enables you to purchase a house without paying the total price out of pocket at the time of the purchase.
For most people, buying a home is the most significant financial transaction of their lifetime. Therefore, if you're in the market for a new home, it's best to learn all you can about home loans and how they work before you get too deep into the process.
Here are some things you may not know about home loans:
Rates fluctuate daily
Borrowers eager to secure a home loan with a low-interest rate may check mortgage rates as often as some people check the weather. Interest rates fluctuate daily, meaning the rate you see today may be different than the one you know when you are approved for the loan.
The cheapest interest rate does not guarantee the most affordable loan.
When choosing a lender, borrowers often select the one offering the lowest interest rate, which can be detrimental. Other factors to consider include closing costs and the lender's policy on releasing equity for a line of credit or a loan. Also, in adjustable-rate mortgages (ARM), the loan featuring the lowest interest rate may not have the lowest rate a few years later and may cost more in the long run.
A fixed-interest rate mortgage can ultimately cost you more.
When interest rates are low, many homebuyers choose a mortgage with an interest rate that is fixed throughout the life of the loan, believing it is the most cost-effective choice. This may or may need to be corrected. A fixed-rate mortgage might come with higher exit fees or fees paid to the lender when repaid. Also, if rates drop further throughout your loan's term, you can only take advantage of the new rates if you refinance. Finally, interest rates on fixed-term mortgages are generally higher than the initial rate on ARMs.
A lower credit score can cost you tens of thousands of dollars in interest.
Most people know that a higher credit score is generally awarded with a lower interest rate, but only a few people know to what extent this is true. A high credit score can translate into tens of thousands of dollars in interest payments over the life of a home loan. A credit score difference of 100 points can increase a monthly mortgage payment by $150 or more, depending on the size of the loan and the interest rate.
If you're considering applying for a home loan soon and your credit isn't in the "outstanding" category (higher than 740), spending a few months working to boost your score before applying for a mortgage may be worthwhile.
The housing market impacts rates.
While the federal funds rate will have the most significant impact on the rise and fall of interest rates, the state of the housing market will affect it, too. Lenders need to turn a profit from their loans, which means the higher the volume of loans they process, the less they need to earn from each one to remain profitable. Consequently, when the housing market is booming and lenders are granting loans frequently, they will be more inclined to offer lower interest rates to borrowers.
You can have your mortgage payments automated.
Your home loan payments will likely be your most significant monthly bill, and missing a payment or paying it late can have serious consequences. Fortunately, you can avoid these scenarios by signing up to have your monthly mortgage payments automatically deducted from your checking account. Most lenders provide this service; check with yours to see if this is an option they offer.
Buying a home will likely be the biggest purchase you ever make. Be sure to find out all there is to know about mortgages and their interest rates before applying for a home loan.