Did you know that borrowers spend twice as much time researching a car purchase than they do a home loan, even though the average home costs five times more than the average car? It’s true. In a survey commissioned last year by Zillow and Harris Interactive, it was learned that the typical borrower only spends five hours researching their home loan, while car shoppers spend 10 hours.
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As a result, borrowers can lose thousands of dollars in mortgage costs due to lack of preparation. To avoid losing out on your hard-earned dollars, here are a few tips to help you take control of the mortgage shopping process:
1. Get your finances in order. Before you even start mortgage shopping, assess your finances. Determine what you can afford. As a rule of thumb, the total cost of your mortgage payment — including any taxes and insurance—should not exceed 30 percent of your take-home pay. You’ll also want to get a good ballpark estimate of your credit score. Your credit score impacts your interest rate as well as your eligibility to get a loan. Currently, one-third of Americans cannot get a home loan because their credit score is below 620.
2. Pick the mortgage type right for you. There two main types of mortgages: Adjustable-rate mortgages (ARM) and fixed-rate mortgages. Adjustable-rate mortgages have fixed rates for a short period (usually 3, 5 or 7 years) and then readjust. These loans are generally considered riskier because the interest rate and payments can increase when the loan adjusts. However, if you are only planning on living in your house for a shorter period, these loans may make sense for you, especially because you’re likely to obtain lower rates.
A fixed-rate mortgage is just that—the rate is fixed. Many people like this type of loan because the interest rate stays constant throughout the period of the loan. With both fixed and adjustable-rate loans you can select various repayment periods. The most common term is 30 years, but if you can afford the higher monthly payments of a 20- or 15-year term loan, you will save money with the lower rate and quicker payoff period. The most important factors in selecting your loan type is the length of time you plan on staying in your home and your risk tolerance.
3. Take advantage of your 30-day window. There is no such thing as too many loan quotes. Borrowers may shy away from getting multiple loan quotes, fearing their credit will be impacted when multiple parties check their credit within a short period of time. However, you have 30 consecutive days in which multiple pulls of your credit score, or “rate shopping,” won’t affect your credit. With that in mind, take advantage of the 30-day window and get as many loan quotes as possible to get the best rates and terms. Note that in order to compare quotes apples-to-apples, it is important to get quotes from lenders around the same time as rates can change daily. It is always wise to double-check the rate you get from a single broker or bank to make sure you really are getting a good rate and that you find a lender that you trust.
4. Compare quotes. Getting loan quotes from multiple sources and comparing those quotes to choose the best loan seems time-consuming. But it doesn’t have to be. Much like what Kayak.com does for travel, there are many websites that allow you to enter your loan request information once and get loan multiple quotes back from multiple lenders, all on one screen.
5. Check the reputation of lenders and brokers. Whether you have already received loan quotes or are researching lenders to contact, do your homework by checking their background. Have they been in the business a long time? If found online, are they accessible? Do they have any third-party reviews and ratings? Reviews and ratings can be an invaluable resource because you can get unbiased feedback from people who have worked directly with the lender.
Remember that shopping for a mortgage could save you thousands of dollars—and who wouldn’t want to do that?