Written by Guest | October 1st, 2019Our goal here at BestCompany.com is to provide you with the honest, reliable information you need to find companies you can trust.
Guest Post by Holly Welles
Talking about home loans can become intimidating quickly for most people. It’s not surprising, given the alphabet soup of loan types and conditions, the anxiety of keeping a good credit score, and the daunting sums of money in play when you make the decision to buy a home.
But you shouldn't allow the gravity of the situation to rush you. Many buyers do. They choose the first home loan option their realtor recommends because they wait too long or can't be bothered to shop around. The truth is, comparison shopping for a home loan is some of the most important shopping you'll ever do.
Do your homework
Before you can approach a lender, you should understand the projected cost of the home you want to buy. This will allow you to make an informed application for pre-approval, which is going to help you negotiate a better price for the property you want.
You don't need to get pre-approved by multiple lenders to cross-shop different loans. But the exercise will get you thinking about how much you'd like to put down, how much you're comfortable paying monthly, and the type of loan you're interested in: for example, an ARM vs. a fixed-rate or FHA loan.
For most shoppers who are working with a real estate agent, the agent will have a small selection of lenders to recommend, or even just a single one. There's also the prospect of using your personal bank as a lender, which may or may not be a good choice. You could speak with a banker about the rates they offer to use as a benchmark while your cross-shop.
To get the best rate, you'll want to get out and explore a variety of lending options. Today, it's possible to transact a loan entirely online, and there are some remarkable rates available through less well-known banks. Whether you feel it's risky to entertain this type of lender is up to you, and thankfully many brick-and-mortar establishments can get close to the lowest rates. That's why it pays to shop around.
Know the loan terms and conditions
The most common type of home loan is a conventional loan. On a conventional loan, the buyer is required to provide at least 3 percent payment down. You'll be required to pay an additional monthly fee for insurance on anything less than 20 percent down, so consider how much you're willing to borrow based on your financial situation. There are also low-down-payment VA loans available to veterans or relatives of veterans and, for smaller amounts, low debt-to-income ratio FHA loans. Explore USDA mortgage opportunities in your area as well.
In some cases, a lender will allow you to pay points, or pay off some of your loan interest ahead of time. This can earn you a lower lending rate but is another incurred cost. Today's average home buyer receives a rate of around 4.5 percent. That's an arbitrary number in the grand scheme of things because rates vary greatly over time. However, at the time of writing, it's possible for someone with good credit to see rates as low as 3 percent or lower in very special cases.
Shop around for a mortgage
At first, you might say to yourself, "A difference of .25 percent in my rate seems like small potatoes." It's true that the monthly payment may only shift a few dollars based on small rate changes, but the key is to consider this number amortized over the 15, 20, or 30 years you'll have the loan. In some situations, such as when you know that you plan to sell a home quickly, you might choose differently than for a home you plan to live in for many years.
Collecting offers from different lenders will encourage the competition to offer you their best deals. You might even be able to come back to your initial lender and give some feedback about what else you've seen. And there are brokers who will help you choose between multiple lenders for an additional fee if you want to speed things up.
The end result of being choosy with your lender is several thousand dollars back in your pocket — or maybe even tens of thousands. Ultimately, that's going to make you a happier homeowner, with more spare change for projects and upgrades.
Be picky and don't wait until the last minute to shop for your next home loan. Comparison shopping can help you stay ahead of the curve and fully explore your options before you stick with a lender for the long haul.