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How To Get The Best Mortgage Rate

by Cardany Realty Group

When you’re buying a home on a tight budget, qualifying for the lowest mortgage rate becomes extremely important. The larger your loan, the greater the impact a difference in interest rates will have on your monthly payments.

For example, if you had a loan of $100,000, the monthly payments would rise by just $30 with an interest rate change from 4.5 percent to 5 percent. If your loan balance were $500,000, the difference in your payment under similar circumstances would be $151.


A lower mortgage rate also impacts the total amount of interest you will pay over the life of your loan. A $100,000 30-year fixed-rate loan at 5 percent requires $93,256 in interest payments; whereas an interest rate of 4.5 percent requires $82,407 in interest payments – a savings of $10,849 over the full length of the loan. Similarly, on a $500,000 loan you could save $54,245 in interest with the lower 4.5 percent rate.


Steps to the Lowest Mortgage Rates

Lenders have different standards and loan programs, so it’s important to shop around on the same day (since rates change frequently) for the same loan terms to find out who is offering the lowest rates. In the meantime, you can also consider these other options to qualify for the lowest interest rate:

Pay points: A discount point, equal to 1 percent of the loan amount, can be used to buy down your interest rate. Generally, paying one point at closing will buy down your rate by about 0.25 percent, but think carefully whether this is the best use of your cash.


Shorten your loan term: Shorter loan terms generally have lower interest rates, although the difference between the rates varies. For example, on Jan. 10, 2014, the average mortgage rate for a 30-year fixed rate loan was 4.64 percent compared to 3.74 percent for a 15-year loan. However, given the shorter term, your payments will be higher.


Consider an ARM: Adjustable rate mortgages (ARMs) have a lower interest rate for the first few years (you can find 1-, 5-, 7- and 10-year ARMs) and then adjust, usually on a yearly basis. You’ll need to qualify for the loan based on the highest possible mortgage rate (ARMs are capped so they can’t go higher than the cap) and be prepared for the worst-case scenario, but in the meantime you can benefit from a lower interest rate.


Improve your credit score: Lenders tack on slightly higher interest rates for borrowers with a credit score of less than 740. The rates are a bit higher for every 20-point difference in your credit score, so making changes such as paying off debt and paying all your bills on time before you apply for a loan can help.

Increase your down payment: Interest rates are also based on your loan-to-value and will be lower if you make a down payment of at least 20 percent. If you can manage to make a down payment of 30 percent or 40 percent your interest rate will be even lower.


Wait to lock-in your interest rate: Home buyers often choose to lock in their mortgage rate 60 to 90 days before closing to avoid the danger of rising rates. However, lenders charge a slightly higher interest rate for lock-in periods. Ask your lender for advice about when to lock in, but you may want to consider a shorter 30-day lock once your settlement date is determined.


While qualifying for the lowest possible interest rate is important, be sure you understand your loan terms and your budget before you sign the papers for a new loan.

Should Your 401(k) Finance Your Down Payment?

by Cardany Realty Group

The thought of taking money out of your 401(k) retirement plan to finance an immediate need can be tempting—but it’s not so simple. You don’t want to risk your retirement plans to pay for something right now—even if it’s a house—if you can avoid doing so.

Depending on the circumstances, you might be able to take early distributions or take a loan out for yourself. However, there are risks and sometimes penalties for doing so.

What Is a 401(k)?

The 401(k) is an employer-instituted retirement plan. Employees voluntarily defer a percentage of their wages directly into their workplace’s 401(k) pension plan. Employers often match these pension contributions with contributions of their own, such as a 50-cent contribution for every dollar deposited by the employee. Some places of employment offer stock in place of monetary contributions.

All of the wage contributions and the company matches are made before taxes, which presents a tax saving for the employee. For example, if you earned $50,000 one year but contributed $3,000 to your 401(k) plan, you would declare taxable income of only $47,000.

The deferred wages earn interest that compounds over the years the pension plan is squirreled away. An employee is able to withdraw distributions from the 401(k) starting at the age of 59-½ years.

Taking Early Distributions

In certain circumstances, you can take money out early (younger than 59-½ years) from your retirement plan. Generally, this is done if you are undergoing a hardship. Keep in mind there are many variations on 401(k) retirement plans, so be sure to review your specific plan. Not all 401(k) plans are required to have a hardship distribution rule, but those that do should cover the following, according to the IRS:

  1. Medical emergencies

  2. Funeral expenses

  3. Payments related to the principal residence, including those needed to prevent eviction or to repair certain damages

Once approved by the company’s pension plan administrator, the employee can receive a substantial hardship distribution. The cost of early withdrawal is very high, though. Once withdrawn, the money is subject to all taxes and penalties and may also be liable for up to 10 percent in additional taxes.

Using a Loan From a 401(k)

In place of an early distribution, some 401(k) plans allow for employee loans. Meaning, when an employee borrows money from his 401(k), he’s borrowing money from himself and then paying the capital and interest back into his own pocket.

The good news: As long as the money is paid back, the loan isn’t taxable. Also, 401(k) loans should not affect your credit score.

The risk: If you lose or move jobs, then you’re obligated to repay the entire loan or pay full taxes and penalties as if it were an early withdrawal.

Keep in mind this will increase your debt-to-income ratio and could disqualify you for the loan or raise the cost of the mortgage. Also be aware that your lender may not let you use a 401(k) loan to buy a house. Also, while your money isn’t in the 401(k), it’s not earning interest.

Should You Take an Early Hardship Distribution From Your 401(k)?

It is probably unwise to use your retirement funds to pay for a house. Retirement money should be kept safe, so when you retire you will have sufficient income to live comfortably and cover your basic needs. But if you really do need the cash—say, you’re close to a foreclosure—taking some cash out of your 401(k) could be a viable option.

Updated from an earlier version by Dini Harris.

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Contact Information

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Cardany Group
RE/MAX Town Center
19873 Century Blvd, Suite 220
Germantown MD 20874
Fax: 888-747-5442