Tim Ellis/Getty Images/Sub
Tim Ellis/Getty Images/Sub
This story was updated on October 1, 2019.
It's hard to imagine a more boring (and dreaded) word than "mortgage." But if you know where to look, you might find a mortgage that will save you thousands of dollars a year or discover that you qualify for a loan when you didn't think you could — and that's exciting. You might even find free money to help with a down payment.
Here are a few ways to get started:
1. Don't just wander into your bank to get a mortgage. Shop around at all kinds of lenders — especially if you're a first-time homebuyer.
Deitra Douglas bought a home in Charlotte, N.C., last year — but only because of a loan program that most people don't even know exists. Though she had a good job, Douglas had been through a divorce and had run up credit card debt, hurting her credit score. Her bank told her she didn't qualify for a mortgage.
A friend told her about a nationwide nonprofit homeownership organization called the Neighborhood Assistance Corporation of America. Under NACA's mortgage program, Douglas took a homebuyer class, demonstrated over time that she was saving money and paid off $11,000 of credit card debt. That qualified her for a mortgage with a low down payment and no closing costs or fees.
NACA founder Bruce Marks calls the program character-based lending that looks at individual circumstances that people can control, like paying rent and bills on time. "It's going back to the old way of doing lending," he says. "She could afford the payment."
Even if you aren't in the same situation as Douglas, shopping around can find you a better deal. In addition to NACA, there are other low down payment options. Federal Housing Administration or FHA loans only require a 3.5 percent down payment and are offered through banks around the country.
2. Find out if you qualify for a grant to help with a down payment.
If you are a first-time homebuyer — or haven't owned a home for at least a few years — you might qualify for a government grant for what's called down payment assistance, which can mean borrowing less on your mortgage.
Marks says to check with your state's housing finance agency and ask about assistance programs.
"There's a lot of grant money around for down payment and closing costs," Marks says. "You can get up to $20,000 to $25,000 in Boston and up to $20,000 in California. They're doing $40,000, $50,000 and sometimes more."
3. Get preapproved for a mortgage before you start shopping for a house.
Preapproval will tell you how much a lender is willing to lend you and forces real estate agents to take you seriously.
4. If you can afford it, get a 15-year mortgage. You will build wealth much more quickly than with a 30-year mortgage.
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Check out the charts. After 10 years of paying for your house, you could have $121,000 worth of ownership built up — or you could have only $42,000, a huge difference.
A 15-year mortgage also means paying less in interest — $50,000 as opposed to $74,000 — over those 10 years. That means each dollar you pay on the 15-year mortgage is doing about three times more work for your wealth.
5. Remember that adjustable-rate loans are risky.
Payments on an adjustable-rate loan may start out small but will fluctuate with the market and could cost much more in the long run than a fixed-rate loan. Think of a fixed-rate loan as a reliable car that will get you where you're going. An adjustable is more like a used car — cheaper, but breakdowns will cost you more money and worry in the long run.
6. Shop around to see if you can avoid paying for private mortgage insurance, or PMI.
Mortgage insurance protects the bank in case the buyer can't pay the mortgage and the bank has to foreclose on the home, and it's often required for buyers who make less than a 20 percent down payment on their home. It can add hundreds to your monthly payments.
If a lender says it has to charge you PMI, you might be able to find a credit union or other lender that will offer the same loan but not charge the mortgage insurance. For example, NACA (the organization mentioned in tip #1) doesn't charge mortgage insurance. Marks also suggests something called wealth-builder loans, which have a 15- or 20-year term and don't charge insurance.
"The best mortgage that you've never heard of is the wealth-builder 15-year mortgage," Marks says. "If you can afford the payments, you need to do that. Build equity really quickly."
7. Don't let the dreaded HELOC monster — home equity line of credit — eat your home equity.
A HELOC is a second loan that uses your home as collateral, once you've built up equity in the house. Many people use HELOCs to finance home repairs or improvements. But too many people use them as piggy banks to pay off credit cards or buy a car, putting their home equity at risk.
8. Be careful about refinancing.
At the beginning of a mortgage, the majority of each monthly payment goes toward interest, so you're not actually paying off much of the principal (the original amount of money borrowed to buy the house). The further you get into a mortgage, the more your monthly payments shift from paying off interest to paying off debt. In other words, when you're five years into your mortgage, each payment is covering more principal than when you first got the loan. When you refinance, you basically restart the clock so that each payment, once again, isn't making much of a dent in the principal. So, Marks says, if you're five or 10 years into a 30-year mortgage and you want or need to refinance, consider getting a 15 or 20-year mortgage to avoid starting over with a mortgage where you're mostly paying off interest.