Gabe Douek

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Mortgage 101

Buying a home is one of the most exciting times of your life! However, it also requires a little more homework than the casual purchase at the mall. While making such a large purchase can be just as scary as it is exciting, fear not! We designed this, step-by-step, Mortgage 101 guide to help you navigate the mortgage proess.

Choosing the house is one thing. Making sure you pay the lowest price possible for that house is another!

One amazingly powerful but often overlooked detail, is the interest rate you pay for your new home.

So here we are today to share how you can buy the maximum amount of house for the minimum price. And for the exact same home, nothing changes price more than the interest rate!

Paying a lower price for a house is always smart. If that’s what you’d like to do, read on.

When To Focus On Rates

  • You’ve Already Picked Out The Home: Rate shopping doesn’t make sense if you don’t have a home you like. Plus, getting excited about a home makes the shopping process all that more fun, especially when a little extra work becomes involved.
  • You Have a Range For Total Price: $250,000 may be the upward limit you’re willing to finance, and that’s fine. Once you decide that number, it’s your job to pay the least amount of money possible for it.   
  • You Want To Minimize Total Cost: Look, it always makes sense to pay the least amount for the same good or service. I’m not saying be cheap, I’m saying pay the minimum amount for the same value. Since this is one of the largest purchases of your life, it’s more important in this process than anywhere else.

How to Get The Lowest Rates

1. Know Before You Go

Your credit score is what will ultimately determine what rate you’ll pay and for how long. This is what determines the total cost of your home, not the price itself.  Since your rate is partly determined by your credit score, it pays to know if your score is bad, good, or great going into the process. If it’s really bad, it makes sense to check anyway (you might be surprised), but to also keep level hopes.

2. Set an Estimated Cap To How Much You’ll Finance.

Your total loan will be based on the negotiated price of the home, which is hopefully as close as possible to its actual worth. Knowing your upper limits before shopping helps you a great deal. It keeps you from overborrowing, a scenario many find themselves in quite easily.

3. Get pre-qualified

This is an easy first step, might affect your credit score only a little, and is usually extremely quick. If there’s any reason purchasing a home wouldn’t make sense, this stage can help shed light on the details.

4. Be Sure to Know When A Credit Inquiry is “Hard” or “Soft.”

Hard pulls affect your credit directly, are usually reported to you in the mail, and are made very clear through a series of disclosures on the lenders part. It’s basically you saying, “Yes, I really intend to borrow this money.”

Soft pulls do less reduction to your score, and are a great way to tread water while shopping rates.

5. Make The Banks Compete To Keep the Rate Low.

This is the crux of how you get maximum home for minimum price: the rate!

Finding the lowest rate among banks is a somewhat straightforward process, but should never be overlooked! What shocks most borrowers, is that the difference between 4% and 5% is NOT 1%! That’s because of how compound interest works. So while many are tempted to say “Oh well,  it’s only one or two percent lower…” in reality that is a much greater cost than a mere 1%. Even more shocking is that the difference between 19% and 20% is not only more than 1%, it’s also more than the difference between 4% and 5%!

The short story is when you have a high rate, moving from 9% to 8% can make massive differences in your financial life. It pays to shop.

6. Compare Rates

Place them all in a column, and rank them lowest to highest. Start doing more in depth exploration of the lowest rates first. Is there a catch? Is the service good? Do people speak well of the bank in general? Be patient and work your way up until you find the best balance of low rate with great service.

7. “Date” The Banks and Rates You Like

You might think rates are all there is to it, and for the most part this is correct. But the dollars are in the details and not all equal rates are serviced equally. Give the bank a call. Do you like how they handle your business? Are they kind? Is the automated system a joke? Do they outsource their service? These factors do matter when you’re considering a 30 years relationship.

When Do I Know If I’ve Got a Great Rate?

Is this a good rate or not? Well, the money question here is always, compared to what? If you only shop one rate, you’ll never know. Even if you shopped 9 rates, maybe the 10th bank, the one you didn’t shop, was the real winner by a mile! It pays to know.

Your best bet is to use this link here to do a quick comparison of published interest rates.

Things like taxes and PMI don’t usually change the total value of your loan, so leave those as zero in the calculator. You can play with those numbers if you want, but your goal here is to just compare the total cost of your loan for the same home, oranges to oranges.

Be hyper-vigilant of your rate comparison, especially considering how much those difference can add up over 30 years!

Mortgage 101: The Bottom Line

Buying a home might be one of the greatest feelings in the world. The happiness you’ll find in your new home can’t be replaced by anything.

The best way to maximize this happiness of course, is to minimize your total home cost. So more than anything, be thorough in your research, and know your options before signing anywhere.  The potential financial impact on your life can be massive.

There’s no way for an article like this to encompass every possible scenario our broad readers might experience, so please consider this a roadmap at best. It almost always pays to consult a professional who can directly address your unique situation.

It’s up to you to do the homework, and the potential rewards could be more than worth it!

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