Money360 Home Loans Guide
Tips on mortgages and loan strategies that will help you prepare to buy the home of your dreams
For generations, an essential part of the American Dream has been nestled inside a picket fence. We’re talking about homeownership, which provides millions of Americans with a source of stability, community and wealth creation. Banks, government agencies and other sources of home loans can help make that dream come true — but you’ll also need to help yourself by being a smart shopper.
Rising home prices have made buying a home more difficult for the average consumer. With home costs increasing faster than wages in most markets, today’s buyers have even more incentive to find the best home loan rates. Fortunately, Money360’s Home Loans Guide has advice on how to get a home loan with favorable terms that could save you some money.
Achieving the dream of owning a home takes work, so roll up your sleeves and let’s get started.
Table of contents
Basics & FAQs
What is a home loan?
The answer may seem obvious, but the term has more depth than you might think. A home loan, or mortgage, is a specific type of secured loan (a loan secured by a house or other real estate property). The borrower is allowed to assume ownership of the house, which serves as collateral, and pays the lender back in installments over a set period of time.
Where do you get a home loan?
Banks once dominated the mortgage landscape, but financial institutions that specialize in loans-only business have overtaken them. Between banks and non-bank mortgage lenders, today’s home buyers have a wealth of choices. Also, consumers with modest incomes may qualify for government-backed mortgages, such as Federal Housing Administration (FHA) loans.
What is a home loan rate?
This term refers to the interest rate paid on mortgages, represented by a percentage of the total amount borrowed (aka the principal). Home loans typically fall into one of two categories: fixed-rate mortgages, in which the interest remains constant throughout the life of the loan; and adjustable rate mortgages (ARM), in which the interest rate starts low and adjusts upward over time.
How much does a mortgage cost?
According to the Mortgage Bankers Association, applications for purchase mortgages resulted in an average loan of $309,200 in January 2017. Remember to take averages with a grain of salt, though. Your mortgage could very well cost more or less. In fact, it could cost a lot less if you can secure one of the best home loan rates.
What is a Loan Estimate?
The Loan Estimate is a consumer protection put in place by the federal government to benefit home buyers. After you apply for a mortgage, the lender will provide you with a three-page form that includes projected costs such as interest, taxes, and closing. The form also describes any special features that may apply to your mortgage loan, such as a prepayment penalty.
See the Loan Estimate Explainer.
What is a Closing Disclosure?
The Closing Disclosure is another consumer protection that lenders are required to provide. After you select a mortgage loan, the lender will send you a five-page form that outlines the terms of the loan, projected monthly payments and other important details.
See the Closing Disclosure Explainer.
Can you get a home loan with bad credit?
Some mortgage lenders will loan to home buyers with less-than-perfect credit. However, bear in mind that you could pay a higher interest rate or have to turn to an adjustable-rate mortgage (ARM) with a low-now/high-later interest structure. With bad credit, you may have to practice even more fiscal discipline than the typical home buyer.
How to get a home loan
Consider these tips to help you get the best home loan rate and make your consumer experience easier.
Do some comparison shopping
If your personal bank offers mortgages, you may consider starting there. You can round out your search by ing other local lenders and by shopping for quotes online. Many sites have automated quote tools that can deliver a quote in minutes. Try to get quotes from three to five different lenders so that you have a good sample for comparison.
Be willing to negotiate
Can you negotiate a mortgage rate? You can — and should. Shopping around for the best home loan rate should prove really helpful in this part of the process. You can inform your prospective lenders of what their competitors are offering and possibly leverage a lower rate.
Assess your credit
A solid credit profile increases your likelihood of getting the best home loan rate possible. Run a free check of your credit report to see your score and look for disputable errors. If you have credit problems, consider waiting until you’ve addressed them before buying a home.
Prepare your paperwork
When it’s time to apply, you’ll need to have some financial documentation ready to show the lender. Get this paperwork ready in advance.
Lenders’ preferences may vary, but in general, the documents can include:
- 1-2 months of pay stubs
- 2-3 of your most recent income tax filings
- 2-3 months of bank account statements
You’ll need similar documentation for anyone else whose name would appear on the loan. If you own a business, you may need to present that documentation as well.
Monthly mortgage payments
When you take out a home loan, you’ve committed to paying off the mortgage one month at a time. Here’s some advice on how to estimate your payments in advance and get a general idea of how much you’ll be paying:
Estimate your monthly payment
Using Money360 Mortgage Calculator and 2017 data collected from several authoritative sources, we’ve estimated a typical monthly mortgage payment. Please note that the figures represent estimated national averages and, in the case of home sales prices, the nationwide median. (The median is the midpoint between the highest and lowest figures, not the average.) The figures do not reflect closing costs and other possible fees.
In other words, your results may vary. Your monthly home loan payment could be higher or lower depending on factors including the lender, the age and condition of the home, the location and your credit score.
Nevertheless, a financing plan for a typical American home buyer might include details like these:
Average credit score: CNBC
Median home sales price: Zillow
Average down payment: Realtor.com
Average interest rate: Bankrate
See if you can lower your payment
If you’ve used Money360 Mortgage Calculator or similar tools and come up with results too pricey for your taste, don’t worry. Some tips to help reduce your monthly mortgage payment include:
- Improve your credit score. As with any other type of loan, the terms you get on a home loan depend in part on the quality of your credit. Taking proactive steps to raise your credit score can help you get a lower interest rate, which should translate to lower monthly payments.
- Make a larger down payment. The 11% average cited by Realtor.com is a departure from the traditional 20% down payment, which many real estate professionals continue to regard as the “gold standard.” Bear in mind that a bigger down payment means a smaller loan, which in turn means less borrowed money that’s subject to interest. If you can afford to put down more money, it could prove to be a wise move.
- Consider an adjustable rate mortgage (ARM). This option could lower your initial monthly payments for a limited time, but you risk paying more in the long run when the rate goes up. Unless you have a solid plan to refinance or sell the home before the rate increases, a so-called “exotic” mortgage loan could prove problematic long-term.
Of course, the ideal way to lower your monthly mortgage payment is to negotiate with the lender before signing the deal. Don’t think of it as haggling. Think of it as due diligence.
Closing the deal
The home stretch can be the most challenging part of the race. For that reason, avoid complacency when it’s time to close on your mortgage.
The Consumer Financial Protection Bureau has a handy checklist that offers several tips on how to approach the closing, which include:
- Ask questions. Make sure you fully understand all the details. If you don’t understand something, ask for an explanation.
- Take your time. You may feel a sense of urgency to complete this long, complex process, but rushing through it could lead to careless mistakes.
- Be prepared to walk away if necessary. Trust your instincts. If intuition tells you something’s not right, better to call it off than commit to a deal that could turn out to be unfavorable.
You’ll likely spend weeks (or even months) finding your ideal mortgage with the best home loan rate available. The closing is no time to coast.
Keep an eye on the future
Buying a house or condominium with a home loan could lead to financial opportunities down the road.
One example is a home equity loan, which involves borrowing against the equity you’ve built up. You could use a home equity loan or a home equity line of credit (HELOC) to borrow money for large improvement projects or other expenses. The possibilities also include refinancing your existing mortgage to get a lower interest rate, shorten the term of the loan, or switch from an adjustable rate to a fixed rate.
However, bear in mind that these strategies carry a certain amount of risk. Use the utmost caution when considering any financial move that involves taking on more debt or reducing your home equity.
Of course, you’ll also need to use the same tools — research and negotiation — that helped you get the best home loan rate when you first bought your house.
Consider the costs
For most people, buying a home is the biggest material investment they’ll ever make. Making a decision this big requires a lot of forethought and careful planning, especially when it comes to your finances. It may be helpful to think of the cost in two phases:
Cost of buying a home
Experts recommend saving up so that you have a lot of liquid cash available because expenses can add up. They usually include:
- Down payment (20% is recommended)
- Title search
Depending on the state and other factors, typical closing costs could range from $1,700 to $2,500.
Cost of owning a home
A lot of financial planners recommend the 26% rule, which says the various costs of owning a home should not exceed 26% of your gross income (before taxes). Those costs usually include:
- Mortgage interest and principal
- Home insurance
- Property taxes
Depending on where you live, these costs may also include HOA (homeowners association) fees.
Are you financially ready?
Owning a home may or may not be the right move for you — or it may not be the right move at the moment. Beware of social pressure urging you to buy a home just because you’ve reached a certain age or hit a career milestone. There’s nothing wrong with waiting until you have the financial resources and the right home in mind before you seek out the best home loan rate.
The most important moment of the home loan process comes early when you make the informed decision to take on the responsibility of homeownership.