When financing a home, one must pay attention to more than just the interest rate of the mortgage. While the interest rate is arguably the most important piece of information, there are other points to consider. One needs to negotiate the best terms, pay the least in fees and other items, and possibly buy points off the interest rate, among other things.
The interest rate is quite possibly the most important factor to consider when financing a home. This is because a reduction in the interest rate of just one point over the life of a thirty-year loan can mean a savings of tens of thousands of dollars. So it is crucial to find the lender that has the lowest interest rate, all things considered.
Settlement costs refer to the amount of money due at signing when financing a home. This includes a loan origination fee, the cost of the survey and appraisal if required, title fees and other miscellaneous fees associated with financing a home. Some settlement costs are negotiable, as part of this money is usually paid as a commission to the loan officer. It is up to the buyer to compare all settlement costs from different lenders when buying a home.
Points are deductions in the interest rate of the home that can be purchased at closing. For example, a lender may offer a reduction in the interest rate in exchange for cash up front. This saves money over the long-term, but increases the amount of money due at settlement.
The amount of money to be financed will also impact the selection of a lender when financing a home. Some lenders require an 80% loan-to value ratio, which means they will not lend over 80% of a home’s value. Others, such as the Federal Housing Authority, might offer up to 98% if it is a buyer’s first home. Either way, the down payment will be part of the settlement costs and must be a factor to consider.
The length of the loan is another large part of the decision-making process when buying a home. Traditionally, the life of any home loan has been 30 years and sometimes people were even penalized for paying off a loan early. In today’s highly-competitive credit market, however, lenders are offering non-traditional home loans of 10-, 15-, or 20-year terms. These loans cost more per month, but they save a fortune in interest costs over the life of the loan.