How To Choose A Mortgage - 5 Things To Consider

Posted by Lenda on December 06, 2017

Thanks to the Internet and the wealth of information available to us, we can window shop from our couch with convenience and comfort for everything from toilet paper to Louis Vuitton handbags. We know how to research the best deals, hunt down coupon codes, and find the fastest, free shipping.

Buying a home, which is likely one of the biggest purchases you will make during your lifetime, should be no different.  Your home’s mortgage can have implications lasting sometimes 30+ years, so choosing wisely is in your financial benefit.

You spend so much time shopping for the right house or condo, ensuring every checklist is completed, so why not shop for the right mortgage, too?

Here are some pointers for finding the mortgage that’s best for you in the long-term:

1. Start by looking at what you can afford

A great tool you can use to determine how much you can afford to spend on a home is a mortgage calculator. Some key factors to consider are how much you (and anyone else who will be contributing to the mortgage) make on an annual basis, along with your monthly bills and how much you need to save. Remember to consider mortgage costs like closing fees and insurance.

The general rule is to never spend more than three times your salary on a home – this is typically the highest amount you’ll qualify for when it comes to a mortgage.

2. Know where your credit stands

Your credit score is one of the determining factors for whether you qualify for a mortgage and how high or low your interest rate will be. Typically, the higher the credit score, the better interest rate you’ll receive. If you have less than ideal credit, you may want to spend time improving your score by paying down credit cards and avoiding any big purchases.

3. Understand the difference between conventional and government-backed

The two main types of mortgages are the conventional mortgage, which is guaranteed by a private lender or a bank and government-backed loans. The three types of government-backed loans are FHA loans, which allow down payments as low as 3.5% of the purchase price; VA loans, which are only available to military service members and veterans and offer low or no down payments; and USDA loans which cater to rural property buyers who meet income requirements.

Conventional loans are backed by private lenders like credit unions, savings institutions, and banks. Those who borrow from private lenders will need good credit to qualify since the loans are not guaranteed by an outside source, posing a greater risk for the borrower to default on the loan. These loans usually have a term of 10, 15, 20 or 30 years.

If you don’t have a lot of cash saved for a down payment, but have a good credit score and a healthy income, a government-backed loan can be a great option. If you can swing a large down payment and also build your credit score while decreasing your debt, you may want to choose a conventional loan.

4. Select a fixed or adjustable rate

When you have decided which loan will work best for you, you need to decide on a fixed or adjustable rate. The interest rate on a fixed loan will remain constant throughout the life of the loan. For many, a fixed-rate loan will be a good option, because your mortgage payment will remain the same.

Adjustable-rate mortgages have interest rates that fluctuate or reset at specific times. These generally begin with lower interest rates than fixed-rate loans and then when the initial term ends, the interest rate increases or decreases every year based on an index, plus a margin. This can often be a good option for those who do not want to stay in their home for more than a few years.

5. Compare lenders and estimates

No two mortgages or mortgage companies are the same. Shop around, meet with lenders. Just a half percent difference in interest between one lender and another over the course of 30 years on a $500K home can be tens of thousands of dollars! Also, be careful not to run your credit too frequently, as too many hard pulls can impact your score. While credit bureaus have come to expect rate shopping, you want to ensure that any pulls are done within a certain time period —most recommend within a 14-day period to be sure.

Making mortgage options work for you

Lenda makes home financing easy. Contact us today and tell us about your unique situation and we'll help you understand what kind of home loan is best for you.

Topics: Mortgage 101

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