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MULTIPLE FACTORS TO YOUR MORTGAGE
When searching for a home and its corresponding home mortgage, it is likely the biggest question you have it “How much will this cost?” The mortgage is usually the largest—and most longstanding—debt you will carry in your lifetime. Understanding this complicated liability will help you to not only find the best lender and rates but take a proactive stance in making financial decisions which would help save money. So, before you take lenders’ advertised rates at face value, let’s break down the mortgage to see where there is “wiggle room” and where the numbers are set in stone.
THINGS YOU CAN’T CHANGE:
Mortgage Rates Just like the weather, mortgage rates change a LOT. Depending on the economy, both national and international, rates move along a scale. From inflation to the Federal Reserve decisions, bonds to the unemployment rate, the economy (and lending rates) can vary—although we wouldn’t use the term “widely” in most cases. The quote you get today may not be there in a few weeks, so keep your finger on the pulse of the market and when you feel comfortable with a quote, lock the rate in. There is always some risk that the rate COULD drop, but at the end of the day, you need to take on a home mortgage payment which fits in your budget, even if the rate changes .25%.
Loan-To-Value (LTV) Ratio The LTV represents the amount you are borrowing compared to the appraised value of your home. Lenders see this as a measurement of risk, because the asset (the home) is what pays off the loan. The more you have borrowed against the value of the home, the less remaining money there is. If the bank were forced to sell the property to get its money back, there is a higher chance that they couldn’t recover the entire amount (if, for example, the housing market dropped or there was some damage to the house which reduced its value). The lower the LTV, the less risk you are to the lender and subsequently, the lower interest rate you will be offered. In addition, you may have to pay for private mortgage insurance to protect the lender’s interest (in the property).
Property Location Unless you are willing to move somewhere else, this factor in your home search is pretty set in stone. Economic conditions in the community you are moving to affect home mortgage rates. There are variations among states, sometimes as much as .25%. Other factors related are foreclosure laws, competition between lenders, and the state of the local economy, which is evident in foreclosure rates and unemployment rates. So, in this situation, “it is what it is.”
THINGS YOU CAN CHANGE:
Your Credit Score This can’t be changed overnight, but your financial behavior affects this 3-digit score. This number, between 300 and 850, is a rating on your creditworthiness. Lenders give you a grade based on conditions like your history of repayment, amount of credit you hold, and how many credit accounts you have paid off. Generally, the higher your credit score, the lower your risk for foreclosure. There are 5 levels of credit scores:
- Excellent: 800 – 850
- Very Good: 740 – 799
- Good: 670 – 739
- Fair: 580 – 669
- Poor: 300 – 579
If you have a credit score that places you in the fair (or lower) category, it is a good idea to repair your credit before obtaining a home mortgage. The most effective way to improve your credit score in a short period of time is to obtain your credit report, ensure all information is accurate, pay off any debts you can, and close unused credit accounts.
Debt-To-Income (DTI) Ratio Entering the home ownership game with a lower debt-to-income ratio is always a good idea. Lenders see you as a better risk if your finances are in good order, with a reasonable amount of disposable income available after your bills are paid. The best way to improve this ratio is to pay off any monthly debts which are bogging you down and avoid taking on any new debt when you are in the process of purchasing a home.
Loan Terms This is an area where you hold the reins. There are many options in loan terms, both in length and rate type, so you should look at all your options. Fixed rate mortgages are most popular and give borrowers a clear picture of the monthly cost they can expect for the lifetime of the loan, be in 10, 15, 20 or even 30 years. Physicians are sometimes interested in obtaining adjustable rate mortgages due to their increasing income potential. With this type of mortgage, you may get a very attractive beginning interest rate (when your income is lower) for a few years (3, 5, 7 and 10 are the most common terms), converting to an adjustable rate at a specific date. At this point your interest rate could go up or down, so its important to get a good picture of what the loan could look like at this point. No matter what, the total interest paid varies depending on what you choose, so make sure to get several quotes.
Down Payment Simply put, the amount you pay up front will affect the amount borrowed. Lenders like to see most borrowers put down a standard 20% of the loan, but physicians are usually eligible for more flexible lending terms, including zero down loans (along with an additional benefit of no private mortgage insurance). However, interest rates (and payments) will be lower with any amount of money you put down.
Who You Borrow From The final aspect of the home mortgage which you can control is WHO you get your mortgage with. Speak with multiple lenders, ask lots of questions, and find out why they have quoted a particular rate, especially if you receive multiple (differing) rate quotes. Ask if it is the best rate they can offer you and if there is anything you can do (put more money down, reduce a few debts, repair your credit report) to improve the rate.
In a consumer-driven industry like mortgages, it pays to shop around. You may have a relationship with this lender for a long time (although banks do sell mortgages periodically to other financial institutions), so you should do business with one who provides the best service AND rate.
What are the current mortgage rates?
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