If you’re like most homebuyers, you simply won’t have the cash on hand to buy a home outright. Thankfully, there are plenty of lenders, such as Clydesdale Bank, willing to front you the money you’ll need.
If you’ve already started researching mortgages, you may have discovered the downside of consumer choice-so many options! However, with a little buyer’s savvy, you can avoid a mortgage that’s just plain wrong for you or costs more than it should. Here are some things you should know about:
- Mortgage basics-interest rates and points
- Fixed rates and adjustable rates
- How much to borrow versus how much to put down
A mortgage is a loan to purchase property, with the property as collateral. That means that if you don’t make the agreed payments, the lender can recover what’s owed by taking possession of and selling the home.
Naturally, the lender gets into this risky business to make money. It does this primarily by charging interest and points. While interest rates and points look like tiny numbers and percentages in the beginning, they add up to big money later. An interest rate is an amount charged by a lender, calculated as a percentage of the loan amount. This helps the provider to make more money. Some mortgage lenders even sell on mortgage notes, allowing other investors, like Amerinote Xchange, to make some money.
Fixed rate mortgages offer predictability and stability. The interest rate is set when you get the loan and never changes. Beyond predictability, fixed-rate mortgages are good for those who want to stay put long-term, particularly if interest rates are low. An interest rate on an adjustable-rate mortgage can fluctuate during the loan term. For buyers who aren’t put off by the risk, or see buying their home as a short-term stepping stone, the adjustable rate may be an attractive option. A smaller down payment may result in a higher interest rate.
How to lower your interest rate
There are a few different ways you can lower your interest rate:
- The type of mortgage you choose. You’ll typically be offered a lower interest rate on an adjustable rate mortgage than on a fixed rate mortgage.
- How risky you are as a borrower. If you have a history of paying bills on time, a steady high income, and low debt, you’ll probably be offered a comparatively low interest rate.
- The loan-to-value ratio. A large down payment tells the lender that you’re not likely to walk away from your investment. A small one, however, makes the lender nervous.
- Whether the loan can be resold. Lenders often resell loans on the secondary mortgage market to free up its capital to make more loans. If your mortgage qualifies for resale, it’s more desirable for the lender, thus you’ll have a lower interest rate.
You’re not stuck with your first mortgage for life. If you sell the house, you’ll get a new mortgage when you buy your next one. And if you decide to stay put, you can refinance your mortgage (look at https://reali.com/new-mortgage/) if rates drop. Though you’ll pay fees to refinance, it could be well worth it.
Saving money on their monthly payment is the main reason. Refinancing allows you to do this by switching to a lower interest rate or eliminating your private mortgage insurance (PMI) payment. Refinancing your mortgage is also a great way to free up equity in your home. The money can be used to pay down high-interest debt, like credit cards or personal loans, or be invested back into your home through remodeling. In addition, refinancing can reduce the length of time you will have to pay back your mortgage. Your mortgage will be cut by years, so you can gain more equity faster or walk away with more money when you sell your home.