A home purchase is likely the biggest investment you'll ever make, so it's critical to get the right mortgage for your needs. Most home buyers take a mortgage over a 30-year term. Interest rates vary depending on whether you obtain a fixed-rate, variable rate or Federal Housing Administration (FHA) loan.
Getting a low interest rate is an important piece of the pie, as minor variations in the rate can make for a lower monthly payment, and a difference of thousands of dollars over the life of your loan. A low interest rate ranks high on the mortgage checklist, but don't neglect other key areas of controlling mortgage costs such as points, closing costs and pre-payment penalty.
Prior to applying for a mortgage, get a copy of your credit report. This gives you the opportunity to correct errors in your report before you apply. Your credit score has an affect on the interest rate you qualify for. Assemble your financial documents prior to applying, as mortgage lenders want a complete picture of your financial state.
30-Year Fixed-Rate Mortgage
This type of mortgage has a fixed interest rate for the life of the loan, with the same predictable payment each month. The interest rate on fixed-rate mortgages are typically a bit higher than the rates on adjustable rate mortgages, but there is the peace of mind knowing your interest rate will not increase. For buyers who have a predictable income and intend to stay in their home for many years, the fixed-rate loan is ideal.
Adjustable Rate Mortgage (ARM)
An ARM 30-year mortgage loan has an adjustable rate that changes periodically. The rate is typically tied to an index. Often there is a low introductory rate for the first year. The rate then adjusts periodically as per the terms defined in the loan agreement. Adjustable rate loans are great for buyers during a period of declining interest rates, or for those who plan on living in the home for a short time. On the down side, ARMs can result in big increases in your mortgage payment should interest rates rise quickly.
Federal Housing Administration Loan (FHA)
First-time homebuyers can qualify for FHA loans with lower down payments and income requirements. The home purchased must be the owners primary residence.
More Tips for Saving on Mortgage Costs
Avoid paying points on your mortgage loan. Points refer to upfront charges in order to obtain a lower interest rate, resulting in high closing costs. Only buyers who intend to remain in their home for many years should consider paying points for a lower interest rate.
Ask your lender or mortgage broker for a 30-year loan with no pre-payment penalty. This gives you the option of paying your loan off before the 30-year term, saving on interest and building equity faster.
Research Rates and Make Your Best Deal
Search today's best mortgage rates online using tools from Bankrate, Zillow or Realtor.com, as well as with your current bank and other local banks.
Query several lenders about interest rates, fees, and points before picking a lender to work with. Select a loan based on your income, job security, how long you plan to stay in your house, and whether it's your first home purchase. Ask for a comprehensive estimate of closing costs prior to committing to a mortgage loan.