So you are officially tired of renting and have decided to have something to show for your monthly investment by buying a home.  Now what?  Because many homeowners don’t know much more about their mortgages than that they have them, an educated home-buyer can have a serious edge in achieving low interest rates in a buyer’s market.  Here are a few things every potential mortgage holder should know: What It Is Contrary to popular belief, a mortgage is technically not a loan, but a security document one gives a lender that protects the lender’s interests in that property.  This means that a bank or financial institution lends you money to purchase a house, you purchase it in your name, but because you owe the bank money, they place a lien on your property that keeps you from transferring title of the property until the debt is paid off.  You, as the borrower, then pay the debt back, with interest, over a fixed period of time, usually 15 or 30 years, though this can vary depending on the product, and of course a homeowner can, with few exceptions, certainly pay off the mortgage earlier. A mortgage differs from a home equity loan in that a home equity loan is an actual loan you qualify for based on how much of your house you actually own.  You then receive a lump sum or line of credit equal to this amount.  This is often called a “second-mortgage”, although it is not a mortgage at all. First Things First Before making any big purchase, you should always decide what you want, both short-term and long-term, as well as what you can afford.  What is the most you can afford to spend a month?  How soon do you wish to own the home outright?  Do you plan to live in it or sell it?  How much will it cost to fix it up? After you answer these questions, consult an online payment calculator.  These will not only estimate your monthly payment based on a given mortgage amount, time period, and interest rate, but will also draw out a month to month amortization table. Adjust the price of the home and the interest rate for a 30-year loan until it matches your budget amount.  Compare this to a bi-weekly loan to see how much you save; how much more does it cost per month?  Is that feasible for you? Don’t forget to include property tax and mortgage insurance. Be aware that adjustable mortgages offer lower interest rates to start, but don’t offer the promise they will stay that way.  Given the current low interest rates, a fixed rate is probably a good choice. However, some mortgage products allow for a window during which you can fix your adjustable interest rate, usually between years two and five.  This way you can take advantage of lower initial rates and have the security of a fixed rate later on. When speaking to lenders, convey to them that you have reviewed this information.  You are more likely to receive a fair rate this way, and lenders will be more likely to trust you. Down Payment Down payment is how much you pay upfront on your mortgage.  Many lenders will allow you to buy down interest rates or “points” by paying a percentage of the principal up front at closing Down payments also mean a lower amount, resulting in lowered interest rates.  If you can borrow money from friends and family, put it in a special account specifically for your down payment, and you can keep the money in there for a short time, banks are likely to view you as able to hold on to money.  This may get you the lower interest rate you need to afford your dream home. Shop Around Be sure to get more than one quotes.  When obtaining these quotes, ask the salespeople for a “quote credit check” and not a full one.  This will put fewer marks on your credit, boosting your score and making you applicable for lower rates. If you have had an account at the same bank for many years, go to them first.  They are likely more familiar with you and willing to trust you, thus willing to offer lower rates. Lastly, investigate alternative options, namely mortgages through the Federal Housing Administration and the Department of Veterans Affairs.  For those who qualify, these can be excellent options with competitive rates. Improve Your Credit Nothing is more important when determining your interest rate than your credit score.  Bring all your bills current and keep them that way.  Make arrangements with all your debtors, not only to reduce your debt, but to keep them from further marring your credit report. If there are any negative marks on your credit, call the companies and ask them what you need to do to have them removed.  The worst they can do is say, “No.” Refinancing Refinancing is what you do if you already own a home, but the lending market has shifted in favor of lower interest rates than you currently.  This is advantageous if your new interest rate saves you more money over time than the upfront costs and fees associated with refinancing.  Cash-back refinancing allows you, as a homeowner, to base your mortgage on an amount larger than what you owe, providing you with instant cash-flow. Refinancing provides options outside of those offered by their current agreements.  This means you are not stuck with the mortgage sign unless you allow yourself to be.  When speaking with a lender, be sure to ask whether their plans offer pre-payment penalties and refinance charges. Karen Zabel is a freelance writer who writes about a variety of topics including mortgage rates.

So you are officially tired of renting and have decided to have something to show for your monthly investment by buying a home.  Now what?  Because many homeowners don’t know much more about their mortgages than that they have them, an educated home-buyer can have a serious edge in achieving low interest rates in a buyer’s market.  Here are a few things every potential mortgage holder should know:

What It Is

Contrary to popular belief, a mortgage is technically not a loan, but a security document one gives a lender that protects the lender’s interests in that property.  This means that a bank or financial institution lends you money to purchase a house, you purchase it in your name, but because you owe the bank money, they place a lien on your property that keeps you from transferring title of the property until the debt is paid off.  You, as the borrower, then pay the debt back, with interest, over a fixed period of time, usually 15 or 30 years, though this can vary depending on the product, and of course a homeowner can, with few exceptions, certainly pay off the mortgage earlier.

A mortgage differs from a home equity loan in that a home equity loan is an actual loan you qualify for based on how much of your house you actually own.  You then receive a lump sum or line of credit equal to this amount.  This is often called a “second-mortgage”, although it is not a mortgage at all.

First Things First

Before making any big purchase, you should always decide what you want, both short-term and long-term, as well as what you can afford.  What is the most you can afford to spend a month?  How soon do you wish to own the home outright?  Do you plan to live in it or sell it?  How much will it cost to fix it up?

After you answer these questions, consult an online payment calculator.  These will not only estimate your monthly payment based on a given mortgage amount, time period, and interest rate, but will also draw out a month to month amortization table.

Adjust the price of the home and the interest rate for a 30-year loan until it matches your budget amount.  Compare this to a bi-weekly loan to see how much you save; how much more does it cost per month?  Is that feasible for you? Don’t forget to include property tax and mortgage insurance.

Be aware that adjustable mortgages offer lower interest rates to start, but don’t offer the promise they will stay that way.  Given the current low interest rates, a fixed rate is probably a good choice.

However, some mortgage products allow for a window during which you can fix your adjustable interest rate, usually between years two and five.  This way you can take advantage of lower initial rates and have the security of a fixed rate later on.

When speaking to lenders, convey to them that you have reviewed this information.  You are more likely to receive a fair rate this way, and lenders will be more likely to trust you.

Down Payment

Down payment is how much you pay upfront on your mortgage.  Many lenders will allow you to buy down interest rates or “points” by paying a percentage of the principal up front at closing

Down payments also mean a lower amount, resulting in lowered interest rates.  If you can borrow money from friends and family, put it in a special account specifically for your down payment, and you can keep the money in there for a short time, banks are likely to view you as able to hold on to money.  This may get you the lower interest rate you need to afford your dream home.

Shop Around

Be sure to get more than one quotes.  When obtaining these quotes, ask the salespeople for a “quote credit check” and not a full one.  This will put fewer marks on your credit, boosting your score and making you applicable for lower rates.

If you have had an account at the same bank for many years, go to them first.  They are likely more familiar with you and willing to trust you, thus willing to offer lower rates.

Lastly, investigate alternative options, namely mortgages through the Federal Housing Administration and the Department of Veterans Affairs.  For those who qualify, these can be excellent options with competitive rates.

Improve Your Credit

Nothing is more important when determining your interest rate than your credit score.  Bring all your bills current and keep them that way.  Make arrangements with all your debtors, not only to reduce your debt, but to keep them from further marring your credit report.

If there are any negative marks on your credit, call the companies and ask them what you need to do to have them removed.  The worst they can do is say, “No.”

Refinancing

Refinancing is what you do if you already own a home, but the lending market has shifted in favor of lower interest rates than you currently.  This is advantageous if your new interest rate saves you more money over time than the upfront costs and fees associated with refinancing.  Cash-back refinancing allows you, as a homeowner, to base your mortgage on an amount larger than what you owe, providing you with instant cash-flow.

Refinancing provides options outside of those offered by their current agreements.  This means you are not stuck with the mortgage sign unless you allow yourself to be.  When speaking with a lender, be sure to ask whether their plans offer pre-payment penalties and refinance charges.

Karen Zabel is a freelance writer who writes about a variety of topics including mortgage rates.