By Nancy Zambell, Chief Analyst Wall Street’s Best Digest, Cabot Wealth Network
Whether you’re buying your first home or downsizing for retirement, applying for and getting a mortgage, or refinancing, can be an arduous and daunting task. One of the biggest challenges, no matter how many times you’ve gone through the process, can be not only finding a good mortgage interest rate, but making sure you are aware of all your other financing options.
Because buying or refinancing a home is a big deal, emotionally and financially. For most of us, it comes with a mixed sense of excitement, relief, and fear.
We wonder if we’ll be able to make the payments if something happens with our job or if big expenses will eat away our savings. But if you know how to get a low mortgage payment, you can allay some of these concerns and enjoy your home.
Or maybe you’re looking for some magic money and could use a little financial help in repairing that leak in the bathroom or updating your 1970s-era kitchen? Taking equity out of your home might be just what the doctor ordered.
Of course, refinancing is not as simple as getting money whenever you want it. But there are ways you can structure a home refinancing to get what you need.
Yes, it may all start with a low rate, but understanding how to establish a low mortgage payment can also help homebuyers feel more comfortable with the amount of money they have to pay each month and the purchase of their home overall.
Striving for a low monthly payment eases the burden
Beyond finding a low mortgage rate, there are other ways to establish a lower monthly payment. This is important to keep in mind since a lot of people make mistakes in purchasing a home and struggle to pay the mortgage in the first few months of home ownership.
Such problems shouldn’t happen if you and the lender each do your due diligence. Part of that process is understanding what it takes to get a lower mortgage payment on the same home. Payments can be lowered either on the initial purchase or down the road if your situation changes.
One of the best ways to set yourself up for lower mortgage payments and a safe repayment process is by making a larger down payment when you purchase your home. This means you will have less to pay back over the life of your mortgage and more equity in your home from the start of your ownership.
Bear in mind, a down payment should be made with the future in mind as well. It wouldn’t make sense to drain your savings. A lower monthly payment doesn’t help you much if you no longer have your emergency savings in place.
You can also take advantage of a longer loan term when you first purchase your home or if you are later in the home ownership process and looking for a way to lower your monthly payments.
With shorter term loans, the bank will require larger monthly payments to reach your payback. Choosing a 30-year loan as opposed to a 15-year mortgage or other shorter-term will give you a smaller monthly payment. This is a useful strategy, especially when interest rates are low.
Private Mortgage Insurance (PMI) is required on Federal Housing Administration (FHA) loans and some conventional loans. Removing PMI from your monthly payments will make them easier to manage, but you’ll need to meet some requirements depending on the type of loan you have.
With a traditional loan, if you put less than a 20% down payment on your home when you first purchase, you will likely need PMI. Once you have 20% equity in your home, you should be able to have PMI removed. On the other hand, with an FHA loan, you will need to refinance to a traditional loan (again, assuming you have 20% equity).
If you’ve locked into a mortgage rate you think could be better, keep in mind you can always refinance down the road if interest rates fall during the life of your loan. This could give you an opportunity to reduce your monthly payments.
This method requires a little more analysis to make sure it is worth your time and money. Refinancing for an interest rate less than 1% lower than your current rate may not save you any money once closing costs are factored in.
None of these strategies for how to get a low mortgage payment are without their risks. Reducing monthly payments always comes at a cost somewhere else. So you must be sure you understand the trade-offs when reducing your monthly payments, or you could face a more significant challenge than you bargained for.
Realize that a good mortgage rate will be different for everyone
Even for people going through the home-buying process for a second or third time, there is still a level of uncertainty. You always want to make sure you’re getting the best possible rates on your mortgage, and sometimes it’s not very clear as to whether or not you can do better. Some banks and lenders will provide the same mortgage rate to anybody they approve. Still, there are certainly ways that you can shop around and find better rates for your mortgage, and it is worth the time to do so.
Finding a good mortgage rate is easier with good credit But, what does that look like exactly? Yes, your credit score will have a lot to do with it, but it is more important to understand the things that add to your credit score. A negative history on your statement isn’t going to help. These include late payments, being in collections, prior bankruptcies, and more. With that said, none of these things will necessarily disqualify you from getting a reasonable rate if the foundation around these mistakes is still strong.
You should also find out if you qualify for a good mortgage rate that allows for 100% financing. If your concern is more about down payments than interest rates, there are mortgage programs that enable 100% financing. You may be eligible for these programs depending on your background (the VA loan is available to people with two years of military service) and where you are looking to buy your home (USDA loans are available in qualifying rural communities).
Besides these no-money-down programs, there are FHA loans available with as little as 3.5% down payments. Make sure to review the qualifications of where you’re buying your home, and if one of these programs may be available for you. They will change your interest rates on your mortgage.
You should also explore multiple lenders to get a good mortgage rate. It does take a little work, but a simple way you can improve your chances of getting a great mortgage rate is by shopping around. When you only look at one lender, you’re closing off any other potential offers. It may very well be that your first lender is the one you end up going with, but you’ll understand how things work and what you should expect by shopping around.
Finding the best rate sometimes starts with finding the best lender
Homeownership is an enormous responsibility that provides you with a large asset that you may, at some point, want to utilize. Whether you are interested in using your home to apply for a line of credit or refinance and get cash on hand, finding a selection of the top refinance lenders makes a big difference.
While the search for the best refinancing rates or lenders might seem straightforward, there are some hidden aspects that you might not think about. If you aren’t looking at all sides of your refinance process, you could end up paying a higher rate than you need to.
The top lenders will let you know about all the details and how they impact each other. Of course, if you don’t know what they should be telling you, it is hard to distinguish the best, from the average, from the worst.
The first place to look for top refinance lenders is the mirror. Yes, look at yourself and figure out what you can do to help your situation. This might seem counterintuitive when you are just looking for the best rate, but much of what dictates the rate you receive is more in your hands than anyone else’s.
For example, looking for outstanding errors in your credit report can make a big difference. These errors are more common than most people would think, and there could be something damaging on your report that has nothing to do with you. Have any errors removed before processing your refinance and you could save a lot of money, no matter who you are working with.
It’s good to have an understanding of the traits the top refinance lenders possess. Be cautious of the lure of no or low-cost loans. Lenders will get their money from you one way or the other.
After all, they are in a business, and if they aren’t making money, they go out of business. You can roll the closing costs into the loan to lower out-of-pocket expenses, but this often raises interest rates as well.
Paying more out of pocket upfront can impact your rates. Plenty of other terms can change your rate as well, including the loan period and whether you take cash out. The best and most trustworthy lenders will let you know how each action will impact your rates and try to educate you on what the long-term impact will look like.
It’s also good to know what top refinance lenders look for in borrowers. As we mentioned, there is a lot you can do to set yourself up for a positive refinancing or home buying experience.
Coincidentally, those proactive actions are also what will give you a good look for potential lenders. Lenders want to see someone who pays their bills reliably and does not have negative comments on their credit report. The lender needs to know their money will keep coming in, and their business will keep going. Lending to too many unreliable debtors is what causes bubbles like the housing crisis of 2008.
If credit is an issue, consider fair credit home loans
Just because you don’t have a stellar credit rating doesn’t mean you aren’t in a strong financial position. Unfortunately, many people think that having a credit rating anything below ‘Excellent’ means they aren’t ideal for applying for credit.
Of course, an excellent credit rating will give you an advantage, but fair credit home loans exist.
Your credit rating is strictly a number that portrays information about your credit history. Your credit score cannot tell a mortgage company or other lender what your current income situation is and how reliable you will be in the future.
The first important thing to understand is that your fair credit rating is not bad. You can even qualify for a mortgage if you have a poor credit rating, albeit with possibly higher mortgage interest rates. You may need to pay more attention to how you proceed with the mortgage application process to give yourself the best opportunity to be approved and get into the house you deserve.
If you are considering this, it is important to recognize the realities behind fair credit home loans. A fair credit rating usually applies to any rating between 580 and 669. Realistically, you could still get a mortgage with a credit rating as low as 500, but anything lower than that, and your first focus should be on increasing your score.
The truth is, there is no set standard requirement for a minimum credit score for a mortgage. Still, individual lenders are able to set their own standards and may draw a line at certain points. One way or the other, all bad credit is not created equally.
Government-backed loans allow for lower credit scores to be accepted but also have mandatory minimums. Overall, lenders will look at much more than just your credit score when considering whether to approve you for a mortgage. Factors include your income, money available for a down payment, and your current level of debt, among other things.
Building credit is always a strong strategy to put yourself into a better situation to get approval and increase your odds at getting favorable terms for your mortgage. If you’re not in any rush to get into a home, focusing on strategies to improve your credit may be a better choice for you rather than applying for mortgages immediately.
On the other hand, don’t think you have to hold off on your plans if you have other things working in your favor. Your chances for approval can be much higher if you have a good amount of money to put towards a down payment or have strong, steady employment to pay off your debts (preferably you have both).
There are places to look for fair credit home loans. There are plenty of lenders that will accept credit scores below 650 and even below 600. New American Funding, Citibank, Mr. Cooper, and BNC National Bank all accept scores below 650. Homebridge, Carrington, Quicken Loans, and Rocket Mortgage all will consider lending to people with scores below 600. Each of these lenders also has programs with low required down payments of as little as 3%.
Getting a mortgage when self-employed doesn’t have to be a hassle
There is a certain freedom in being an entrepreneur. No one telling you what to do or when to clock in … except for every one of your customers. But that’s another story. As satisfying as it may be to be your own boss, getting a mortgage when self-employed is not, shall we say, without some challenges.
Yes, you can certainly qualify for a home loan. Your path may just look a little different without the typical W2 forms and other paperwork that comes with traditional employment. But once you understand the differences and get your information in order, getting a mortgage when self-employed isn’t any more or less difficult than it is for anyone else.
Getting a mortgage when self-employed is easier with appropriate documentation, work history, and tax records, which are essential in letting a lender know that you will make your payments. This can be a little more complicated for self-employed individuals for a few reasons:
If you are newly self-employed, the lender will want some proof that your income is reliable and consistent (some lenders will look for two years of employment in the same job type).
Many self-employed individuals write off expenses and show smaller profits or even annual losses (a business that doesn’t profit doesn’t earn trust in a lender’s eyes).
Fluctuating income from one year to another can look like a risk to lenders. But while these are real challenges, it doesn’t mean getting a mortgage when self-employed is impossible. Getting a mortgage when self-employed is easier with a bigger down payment.
All the documentation, work history, and other information revolve around proving your creditworthiness, and it remains crucial. But, at the end of the day, if you are able and willing to take some of the risks off their table, that is in your favor. The more of a down payment you can make, the more it will help you. However, you still need to prove that you manage your money reasonably and have a reliable credit history. It’s just that with a larger down payment, monthly payments will be smaller, and it will be easier to trust you.
Getting a mortgage when self-employed is easier with little to no existing debt. So having minimal or no existing debt goes back into the same story of being less of a risk for your lender. If you don’t have any other debts to pay, the lender will know you’ll have an easier time paying this debt since it will be your priority.
At the same time, having no history of debt can sometimes work against you. A complete lack of debt history gives them trouble in understanding how you work with debt. If you have college loans, car loans, personal loans, or other mortgages you’ve paid, they know you’re a trustworthy borrower. Without a history of debt, there is no way to know.
Overall, you’ll want to do everything you can to prove you are trustworthy. If you don’t have credit, get some. If you have debts, pay them down (or pay them off if you can). If you can make a more significant down payment, do it. Gaining the lender’s trust is your road to a mortgage.
Getting pre-qualified will help make things quicker and easier
Learning how to get prequalified for a home loan is a relatively informal process that can move you in the right direction towards homeownership. It is more for people who are not yet sure if they are in the right financial situation for homeownership as the process checks on your creditworthiness to see what kind of mortgage you may qualify for.
But it’s also important to point out that prequalification cannot guarantee your approval for a loan. Think of it as an estimate. If you are more confident in your financial standing, you may already be ready for a preapproval application. Where prequalification works to show your genuine intention to buy a home, a preapproval expresses your readiness.
While prequalification does not go through the formal and official checks that a preapproval goes through, having a prequalification letter from a lender goes a long way in showing sellers that you are serious about purchasing a home. Even more important, the prequalification process lets you know how serious you can be about a home purchase. If you’re not yet where you need to be, the prequalification can serve as a guide to let you know what you need to do to get into the home you are longing for.
Getting a prequalification letter from a lender is surprisingly simple, but you can make it even easier by being prepared with what you need ahead of time. Your lender will be interested in basically just five things: Your income, debt, assets, credit history, and the down payment you can make.
While they will be looking for this information – and you should have it prepared – it doesn’t necessarily mean that you need to know your exact numbers or even prove these things. You will need proof and all your supporting documents when preapproval comes around. For now, the best estimate you can give is sufficient. Although, if you can provide the paperwork, you can have a more exact idea of what you can afford. You don’t want to get these numbers wrong because you will be given a completely inaccurate estimate in return.
To put yourself in the best position to prequalify for a home loan, know your information inside and out. Many people don’t know their real income-to-debt ratio and ignoring information that is perfectly available to you will work more against you than for you. Look at your pay stubs. Know exactly what your monthly income is and what portion of that income is already committed towards debts.
Take stock of all the assets you own, their total value, and what amount of your assets you have in available cash that can go towards a down payment. Of course, you shouldn’t put everything you have available on your down payment. This process is one to show you what you’re ready for and let you know where you have more preparation to do.
Understanding typical refinance fees will help you avoid surprises
Some surprises in life are good. Other surprises? Not so good. The home buying and refinancing process are places where you don’t want any surprises coming your way. And if you don’t prepare ahead of time for typical refinance fees, you could be in for a number of unpleasant surprises.
When people talk about the cost of buying a home or refinancing, the fees are often referred to as “the closing costs.” The term can be deceiving since it creates the interpretation that there is one fee that you will have to pay. In fact, many fees can and will arise. Exactly how many may depend on your lender and the specifics of your refinance. When you understand everything that can come along and educate yourself about why they might come up, you will be in a much better position to decide whether a refinance is right for you at this time.
The most common fees could be small and seemingly insignificant, or they could become a more considerable nuisance that makes you rethink what you’re doing. Fortunately, by understanding these costs, you’ll see them coming and be able to make an appropriate decision ahead of time.
The Loan Application Fee is precisely what it sounds like: a fee just so you can apply for a loan or, in this case, a mortgage. It never feels quite right that people do this, but they do have employees and their own processing fees to account for. A loan application fee is often unavoidable and could be anywhere from $75 to $500.
An origination fee is a fee associated with the creation of the loan. Origination fees are a percentage of the total amount of the loan. The fee will range anywhere from 0% to 1.5% of the mortgage amount in most cases. This typical refinance fee can amount to one of the largest fees depending on the size of your refinance.
If you need to conduct a search for the title or pay for title insurance, there will be fees with that too. These fees are well worth it to avoid the risk of somebody making a claim on your home in the future. You should expect this fee to be at least $400 and possibly up to $1,000.
Mortgage Points can be confusing to somebody that hasn’t dealt with them before. They are essentially a piece of the loan that you pay upfront. Points are often optional and lower the loan’s interest rate since it reduces the lender’s risk.
Each ‘point’ you buy is equal to 1% of the loan amount. So, on a $400,000 refinance, buying .5 points would be .5%, creating an additional $2,000.
It’s best to have a professional oversee the closing of the loan process, and some states even require it. Whether this person is a title agent or real estate attorney, their services will come with a fee. You should expect this typical refinancing fee to be anywhere from $500 to $1,000.
Remember that with refinancing, many of these fees can be rolled into the total of your refinance, so you wouldn’t need to pay them upfront. Save this as an option but take account of how this could change the landscape of paying your loan.
There are alternative ways to get equity out of your home besides selling it
When you need cash and don’t know where to look, one of the best places to find value is in the most valuable thing you own, your home. But there are other ways to access the equity you have in your home without having to sell it.
Having equity in your home gives you choices and opportunities, but making the right choice is entirely up to you. There are a variety of ways to access the equity in your home, and any one of them (or none of them) could be the best option for you.
Depending on what you need money for and how much equity you have, any of the following could be a great strategy.
Consider alternative ways to get equity out of your home like cash-out refinancing. A cash-out refinance can be an excellent strategy for a savvy investor or somebody looking for equity in their home. This strategy refinances your home and allows you to take a portion of the refinance in cash. For example, if you have a balance of $100,000 remaining on your mortgage, you could refinance $150,000 and take $50,000 in cash. But, this only works if, after the refinance, you will still have 20% in equity remaining in your home so you’ll avoid PMI. You cannot do a cash-out refinance for the total value of the property.
A home equity loan can be another great way to gain money at a low-interest rate. Most other types of loans will land you with a much higher interest rate, while home equity loans will usually give you a rate that looks more like an initial mortgage. Similar to a cash-out refinance, with most lenders, you need to still have a minimum of 20% equity in your home after the home equity loan.
Be aware that home equity loans put a second lien on your property, which gives another lender a new claim to your home if you ever fail to make payments. While this is a great way to get a low-interest loan, exercise the strategy with caution and make sure you don’t put yourself in a situation where you struggle to make payments.
The reverse mortgage is also another way. The reverse mortgage received a lot of bad press as a scam because older individuals were misled into misusing the strategy. A reverse mortgage is a technique where no loan payments are required. Instead of making loan payments on a property or mortgage, a lending company will make payments to the homeowner. Essentially, this works as if the lending company was repurchasing the house from the owner. The federal government backs quality reverse mortgages, but there are scams that equity seekers should be aware of.
The idea around a reverse mortgage is that the amount of money owed will never exceed the value of the home itself. This could happen in some scenarios (usually if the home’s value drops), but the point is to have the home pay off the remaining balance when money is no longer needed (for example, at death). This is why reverse mortgages are for people over 62. Exercise this strategy with caution as the result is usually that you no longer own your home.