They can make all the difference when it comes to getting approval at a low rate.
Applying for a mortgage is an important financial decision. If you are approved and go ahead with the purchase of a property using the loan proceeds, you will commit to paying your lender several thousand dollars for decades to come.
You’ll want to get the best possible deal on a home loan and maximize the chances of getting approval from various lenders so that you can research the best mortgage rates.
To make sure you’re as prepared as possible to assess loan options and get an affordable mortgage, you need to know three numbers.
1. Interest rate
The interest rate determines the amount you will pay for the loan. It is expressed as a percentage, for example 3%. You will pay interest each year on the loan balance until it is paid off.
Most lenders will give you an estimate of your interest rate before you submit a formal loan application. Many can do this without a thorough investigation of your credit, which would stay on your credit report for two years and lower your score slightly.
Obtaining this estimate in advance helps you determine if a loan is more expensive than another so that you can make the decision to apply for only the most affordable loan.
2. Closing costs
Closing costs are an upfront fee that you have to pay when you finalize your loan. They include expenses for things like appraisal, credit checks, mortgage origination fees, transfer taxes, and title insurance.
If you have to pay points, these will also be part of your closing costs. Points are fees that you can pay to reduce the interest rate on your loan. For example, you could pay a point that would cost 1% of your loan amount and reduce your interest rate by 25 basis points.
Lenders should provide an estimate of your closing costs amount at the start of the application process. If one lender’s closing costs are much higher than another, you may prefer to choose the lender with the lowest closing costs.
This is especially true if two lenders offer you the same interest rate, but one of them requires you to pay points to get it. In this scenario, the loan where you have to pay the points is much more expensive. You would pay to reduce the interest rate, just to equal the rate that another lender is offering at no additional cost.
3. Loan to value ratio
Finally, you need to know the value of your future loan compared to the market value of your home. For example, if you want to borrow $ 300,000 to buy a house for $ 350,000, your loan-to-value ratio would be around 86%.
Ideally, your loan-to-value ratio would be 80% or less, which would mean you would make a 20% down payment. If you do this, you’ll avoid having to pay extra fees for what’s called private mortgage insurance (PMI), which lenders require you to buy to protect them from losses if you have a small down payment.
If you can’t get such a large down payment, there are lenders that allow a higher loan-to-value ratio. In fact, with a down payment as low as 3%, it is often possible to find lenders offering loans with a loan to value ratio of 97%.
However, you will have fewer lender choices and can expect a higher interest rate as well as additional PMI costs. You need to know the loan-to-value ratio before you apply for a loan so that you know which lenders are likely to approve you and what a realistic interest rate is.
By understanding each of these three numbers, you can make informed choices when deciding which loans to apply for and compare the loan offers that lenders are offering you. This will help you find the best mortgage for your needs.