Shopping for a new home is exciting, but securing a low-interest mortgage can sometimes seem an undefeatable battle. With many variables and mortgage types, borrowers may feel ill-equipped to navigate the waters and secure the best mortgage for their home-buying needs. Learning about the options and how to find the right rate helps home buyers feel more confident as they enter the market for a new home.
Types of Mortgages
Depending on the borrower’s credit score and debt-to-income ratio, lenders offer various mortgages. The following breaks down the options for homeowners considering a 15 year mortgage.
Prime Mortgages
Lenders offer prime mortgages to borrowers who present less of a risk. Most borrowers offered a prime mortgage will have at least 670 credit scores or higher. Candidates for this type of mortgage typically make 10% to 20% downpayments.
Subprime Mortgages
Lenders offer subprime mortgages to borrowers with less-than-perfect credit scores, usually between 580 and 669. Several options exist, including the adjustable-rate mortgage (ARM), interest-only, and fixed-rate.
Alt-A Mortgages
Alt-A mortgages are the midground of mortgages. Lenders often do not require extensive documentation to prove income and other financial stats. Borrowers may pursue this type of mortgage if they have a new job or if other circumstances are not considered favorable by strict lenders.
Tips for Finding the Best Deals on Mortgage Rates
Higher interest rates lead to higher payments, so seeking the best mortgage rates is advantageous. While there is competition among lenders, this does not mean one will offer you a better rate to beat others. Consider the following tips for securing the best mortgage rate available.
Credit Score Improvement
The borrower’s credit score is one of the most significant factors regarding an offered interest rate. Lenders are looking for borrowers with as little risk as possible. Those house-hunting need to consider getting their finances in order first. Pay off as much credit card and personal debt as possible. Aim for a credit score of 700 or higher.
Increase the Downpayment
Saving for a downpayment becomes essential when seeking a mortgage, but borrowers can often secure lower rates simply by having a hefty downpayment. Putting 30% down instead of the conventional 20% could drop rates. Begin saving for a downpayment as soon as possible.
Gather Documentation
Lenders will need documentation to prove the borrower’s financial history. They generally want documentation for at least two years of income and employment. Salaried or self-employed borrowers can expect to provide a copy of their tax returns and W2s. Having these documents ready before starting the process saves time and aggravation.
Shop Around for the Best Mortgage Rates
It is important to compare mortgage lenders to get the best rates possible. Most of the work of securing the best rates begins before the borrower fills out any paperwork. Although borrowers should seek information from their current financial institutions, these may not always offer the best rates. Branching outside your bank can lead to better rates that save you money.
Shop around by comparing interest rates offered by various lenders. Talk to them and ask pertinent questions to perform an educated comparison. Use a mortgage calculator to help determine which will save you the most money over the life of your mortgage. With a solid credit score and a larger downpayment, you can navigate the choppy waters of mortgage shopping without feeling overwhelmed.
