How to Choose a Mortgage
One of the biggest financial decisions anyone ever makes is choosing a mortgage loan. Even the savviest of shoppers in any other circumstances can find themselves overwhelmed and confused when shopping for the right mortgage. Choosing a mortgage does not have to be difficult, in order to make the right choice, buyers need to follow a few basic steps:
Step 1: Choose a term.
Most mortgages are repaid over either a fifteen or thirty year term. In general, shorter-term loans have lower interest rates, but longer term loans will have a smaller monthly payment. If paying off your home quickly, and in turn, saving thousands of dollars in interest is important, then a homeowner should shop for a fifteen year mortgage. For buyers who are looking for the most affordable monthly payments, thirty year mortgages are generally a better choice.
Step 2: Look into special programs.
Some of the best mortgage rates and terms are found in special government programs. The two most common government loan programs include the Veteran's Administration (VA) and Federal Housing Administration (FHA) loans. There are also many other programs ranging from tax credits for first time buyers to down payment assistance for teachers and police officers. Buyers should ask their mortgage broker to check to see if they are eligible for any of these programs before choosing a conventional loan.
Step 3: Fixed Rate or Adjustable?
The adjustable rate loan has been blamed by many as the single largest cause of the real estate collapse of 2008. While adjustable rate mortgages can be risky, there are situations in which they can be a wise choice. The general rules of thumb when choosing between fixed and adjustable mortgages is how long a homeowner plans to stay in a home, and what the owners income projections will be over the next few years. For buyers planning to live in a home forever, today's low rates make a fixed mortgage a safe and wise choice. For those who are planning to move up in five years or less, and adjustable rate loan with a lower monthly payment might be a good choice.
Step 4: Check your credit.
The best loan terms are given to those buyers who have excellent credit. Before applying for a loan, buyers would be smart to check their own credit to be sure there are no errors on their credit report. This small, free step can save the thousands of dollars in higher interest that is charged by lenders to buyers with poor credit scores.
Step 5: Find the best lender.
Once a buyer has chosen the right loan, it is still a good idea for a home buyer to shop around for the best lender. Things to look for include large upfront points and fees, and closing costs which are higher than competing lenders. In general, if a buyer is going to stay in a home forever, paying points can save a lot of money over the course of the loan, however for buyers planning to move within five or fewer years, points will cost much more than they will save. Another red flag to look for is a lender who charges prepayment penalties. This means if interest rates drop, the homeowner will have to pay the original lender a huge fine in order to refinance, and should be avoided.
