For most people, purchasing a house represents the single largest investment they will ever make. It also represents the largest amount of money they will ever borrow. The interest and principle on the loan will be paid each month for decades. For these reasons, it is important to compare offers from multiple mortgage lenders to ensure you are receiving the best possible terms.

This article will highlight several key details about the process of shopping for a mortgage loan. You\’ll learn how to improve your chances of finding the best terms, and items to keep in mind while considering offers from lenders. We\’ll discuss PMI and the role it plays in your future mortgage payments, and describe a few types of loans that are available to you.

Laying The Groundwork Before Looking For A Loan

Prior to searching for a lender, make certain your credit profile is accurate and as clean as possible. Mortgage lenders offer better terms to those whose credit histories and debt-to-income ratios suggest responsible financial stewardship.

First, request a copy of your credit report from each of the three credit bureaus (Experian, Equifax, and TransUnion). Review each report carefully for errors. Financial institutions and stores that offer revolving credit accounts to their customers make occasional mistakes. Unless the consumer catches them, these mistakes remain on his or her credit history, suppressing the person\’s FICO score. If you notice errors, contact the credit bureaus to have them resolved.

Second, start paying down the balances of your highest-interest credit cards. If you have several open accounts, close the majority of them after they are paid off. Keep two or three open. Mortgage lenders gravitate toward borrowers who are responsible with their revolving credit accounts.

With these steps completed or in place, it\’s time to shop for a loan.

Searching For A Mortgage Lender

Realize that each inquiry into your credit history can lower your FICO score. For this reason, withhold permission from potential lenders to pull your history. Instead, ask each of them to present tentative terms based on a presumption of your credit score. This allows you to compare terms between multiple lenders without generating unnecessary \”hard pulls\” (i.e. external inquiries) against your credit.

When you review the terms offered by prospective lenders, pay particular note to their closing costs and points. These are the areas in which many mortgage originators generate profit. Closing costs can include underwriting fees, appraisal fees, application fees, and fees for loan origination, flood determination (in certain locations), and broker services. Some fees are necessary; others are not. The latter are usually negotiable.

Points are another type of fee that is based on the amount of your mortgage loan. Each point represents 1 percent of the loan amount. For example, 1 point on a $200,000 loan would be $2,000. For each point paid upfront, the interest rate on the loan is typically reduced by 1/4 percent. This too is negotiable with lenders.

Understanding Private Mortgage Insurance (PMI)

Private mortgage insurance provides protection to the mortgage lender in the event you are unable to make your monthly payments. You can circumvent paying for PMI by making a down payment that is at least 20 percent of your new home\’s value. If you are unable to do so, expect to pay between $100 and $200 a month in addition to your mortgage payment.

In most cases, you can eliminate the monthly PMI payment during the course of your mortgage if your equity ownership in your home reaches a certain level. The level is determined by your lender.

Summary Of Mortgage Loan Types

There are several loan types, with each designed to meet a borrower\’s needs given specific circumstances. For example, adjustable-rate mortgage loans (ARMs) are offered with a rate that is kept low during an initial period (e.g. 7 years). At the end of this period, the rate is allowed to adjust to reflect the current market rate.

Fixed-rate loans are straightforward. The loan is offered with an interest rate that remains the same during the life of the loan. This makes it easier for the homebuyer to forecast future mortgage payments.

Interest-only loans allow homebuyers to essentially pay only the interest generated by their loans. These were popular several years ago, but are less common today.

There are several other mortgage loan types, such as FHA loans, bridge loans, and reverse mortgages. However, conventional fixed-rate loans and ARMs continue to be the most prevalent. The key to finding the best terms is to shop around and compare them between lenders.

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