Choosing a Home Loan

HouseFor most people, buying a home is the biggest financial investment they will ever make. Because of the size of the commitment, most buyers need a home loan. That makes it extremely important to make the right choice when choosing a mortgage.

The first thing you need to consider when getting a mortgage is what shape your credit score is in. Your credit score plays a large role in whether you can get a mortgage and how low an interest rate you can get. The better your score, the lower rate you will get. Most lenders require a FICO credit score of at least 720 to get the lowest rate and some may require a score as high as 750.

Another consideration is what shape your finances are in. Lenders look at your debt-to-income ratio to determine how much you can borrow. Most won`t allow your mortgage debt to be more than 28 percent of your monthly income and your total debt, including your mortgage payment, to be more than 35 percent of your monthly income. If you have a lot of debt, you may want to consider paying some of it off before applying for a mortgage.

Keep in mind that any loan you get will have closing costs associated with it. Closing costs include things such as prepaid taxes and insurance, inspection costs and loan origination fees. Closing costs usually add about 1 to 2 percent of your loan amount, which is on top of your down payment, so keep that in mind as you assess your out-of-pocket costs to secure the loan.

Your down payment amount is important as well. If you are getting a conventional loan, meaning one that meets the standards demanded by Freddie Mac or Fannie Mae, you will have to have a 20 percent cash down payment. If you don`t, you will have to pay for private mortgage insurance. Some government programs, such as VA or FHA loans, require smaller down payments.

The term of your mortgage is also an important consideration. Most people get a 30-year mortgage, which means your monthly payments will be lower, but you will pay more for your house in the long run. Mortgages with 15-year terms have higher monthly payments but also mean you pay a lot less in interest over the term of the loan. Fifteen-year mortgages also come with slightly lower interest rates as well. Another option is an adjustable-rate mortgage, which starts out with a lower-than-market interest rate and then adjusts after an initial term is over. If you get such a loan, you have to keep in mind what interest rates are likely to do and what your payment could increase to once your initial term is up.

If your credit is not so great and you have a bankruptcy in your background, you may still be able to qualify for a mortgage, but be prepared to pay a higher interest rate. Do your research before you start.




Need To Know About Loans

loanBorrowing money is a necessity for nearly everyone, even those who may be considered affluent need to establish a credit history. From the lender’s vantage point, different types of borrowing have varying degrees of risk no matter what level of income the applicant has. Unsecured lending is riskier with no collateral to collect, if the account goes into default; while a secured loan is less risky for lenders. This is one reason why interest rates fluctuate; the others being inflation, monetary policies and economic forces in the market place that impact the bottom line, requiring an increase to recoup lost or dwindling revenues.

With the tightening of lending restrictions, consumers of all income levels may find it more difficult to secure the money they need. The smart consumer knows in advance of applying for a loan the average lending rates for that particular need. With the information in hand, they will be able to recognize a good loan offer from one that will cost more. Here are the most recent average rates for various types of lending.

  • Mortgage rates are at an all-time low, making it the perfect time to buy or refinance to reduce your current mortgage payment. Fixed rates are the standard term for most lenders. As of August 16, the average rate for a 30-year fixed was 3.56%; while a 15-year fixed-rate mortgage stood at 2.88%.
  • Auto loans are the second largest debt for most consumers after mortgages. The rates fluctuate from seller to seller, depending on whether the dealer is taking the risk of lending you the funds or they bundle multiple accounts and sell them to an investor. The current average rate for a 48-month new car loan is at a record low of 2.25%, with the longest available loan of 72 months at 3.74%. In the market for a used car for model years 2005-2008, the average for a 36-month loan is currently 2.25%.
  • Student loans backed by the Fed (Stafford loans) are fixed at 3.4%; while private institutions with variable interest rates traditionally are higher but currently range from 3.25% to 9.25%.
  • Credit cards have maintained a consistent interest rate during the last few months, with the average rate of just short of 15 percent at 14.97%. In addition, current offers include generous long-term introductory rates of up to 21 months that can save consumers hundreds of dollars in interest.

Tracking Rates

The Wall Street Journal’s Market Data Center posts the prime rate for 30 financial institutions. Mortgages, auto loans and credit card rates adjust in step with changes in this rate. To track current rates for mortgages, auto loans and market funds, check your local newspaper; most publish a list at least weekly. Another online source that may help consumers who are looking to borrow is, a website that projects future rates.