What You Didn’t Know About Home Loans
A home loan, otherwise known as a mortgage, enables you to purchase a house without paying the full price out of pocket at the time of the purchase.
For most people, buying a home is the biggest financial transaction of their lifetime. For that reason, if you’re in the market for a new home, it’s best to learn all you can about home loans and how they work before you get too deep into the process.
Here are some things you may not know about home loans:
Rates Fluctuate Daily
Borrowers who are eager to secure a home loan with a low-interest rate may get into the habit of checking mortgage rates as often as some people check the weather. Interest rates fluctuate every day, which means the rate you see today may be different than the one you see when you actually are approved for the loan.
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The Cheapest Interest Rate Does Not Guarantee The Cheapest Loan
When choosing a lender, borrowers will often choose the one offering the lowest interest rate, but this can actually be to their detriment. There are other factors to consider, including closing costs and the lender’s policy on releasing equity for a line of credit or a loan. Also, in adjustable-rate mortgages (ARM), the loan featuring the lowest interest rate may not have the lowest rate a few years down the line and may actually cost more in the long run.
A Fixed-Interest Rate Mortgage Can Ultimately Cost You More
When interest rates are low, many homebuyers choose a mortgage with an interest rate that is fixed throughout the life of the loan, believing it is the most cost-effective choice. This may or may not be correct. A fixed-rate mortgage might come with higher exit fees, or fees paid to the lender when the loan is repaid. Also, if rates drop further throughout your loan’s term, you won’t be able to take advantage of the new rates unless you refinance. Finally, interest rates on fixed-term mortgages are generally higher than the initial rate on ARMs.
A Lower Credit Score Can Cost You Tens Of Thousands Of Dollars In Interest
Most people know that a higher credit score is generally awarded with a lower interest rate, but not many people know to what extent this is true. A low credit score can translate into tens of thousands of dollars in interest payments over the life of a home loan. A credit score difference of 100 points can increase a monthly mortgage payment by $150 or more, depending on the size of the loan and the interest rate.
If you’re thinking of applying for a home loan soon and your credit isn’t in the “very good” category (higher than 740), it may be worthwhile to spend a few months working to boost your score before you apply for a mortgage.
