Since you’ll be paying off your mortgage for many years, it’s important to find a home loan that best meets your needs and budget. Remember, when you take out a mortgage loan, you’re borrowing money that you legally agree to pay back. This is a big commitment that you should not take on without considerable thought. You should know how to choose the best mortgage to get the best deal.
What good is an amazing home if you’re stuck with a less than ideal mortgage?
6 Factors to Consider When Choosing a Mortgage
Keep reading to learn all of the factors to consider when choosing the best mortgage.
1) Figure Out How Much You Can Afford
Most homes are within the five- to six-figure range. Seeing such big numbers, you may start to wonder how much you can comfortably afford.
Before you start house hunting, you should figure out how much house you can afford. Don’t put yourself in a position of being house poor! As a rule of thumb, you should be spending no more than 30% of your gross income on housing costs.
Remember that how much the house will actually cost you depends not only on the price of the home, but also on the mortgage that you choose. Use our mortgage calculator to get a rough estimate of what you can expect to pay each month depending on the home and mortgage that you choose. You can compare different options to find out how much house you can comfortably afford and determine the best mortgage terms for you.
2) Set a Savings Goal to Cover Upfront Costs
Lenders not only look at whether you can qualify for the loan amount you request, but also at whether you have funds in the bank to cover the closing costs and down payment.
For most home buyers, the down payment is the biggest hurdle. However, it’s in your best interest to put as much down as possible. This way you can buy with instant home equity and qualify for better mortgage rates.
One of the most important factors to consider when choosing a mortgage lender and mortgage type is the required upfront costs that you must pay.
If you’re like most people, you don’t have the money to cover a 10%, let alone 20%, down payment. When choosing a home loan, pick one that you can afford without draining your entire savings account.
3) Consider the Length of the Mortgage Loan
Most homebuyers take out a mortgage loan with a 30-year term. But what if this house isn’t your forever home? If you don’t want to commit to staying in a home for three decades, there are other options to consider.
Lenders also offer 10-year fixed-rate mortgages as well as 15-y fixed-rate mortgages. Some even have varying loan lengths that are customized to your specific needs. A fixed-rate loan ensures that your payments won’t increase drastically over the life of the loan.
If you can swing a bigger payment each month, choose a loan with a shorter loan term. You’ll not only get a better interest rate, but you’ll pay much less in interest overall.
4) Choose the Right Mortgage Type
There are many different types of mortgages to choose from. Some of the most popular mortgage types include:
The benefit of USDA loans is that they offer 100% financing (no down payment), a low, fixed interest rate, and flexible qualifying criteria. If you’re moving to a rural or suburban area, consider USDA mortgage loans’ pros and cons.
Are you a military member looking to buy a home with your non-military spouse? You’re in luck! A VA mortgage loan cosigner can be anyone and isn’t limited to military members and veterans.
If you don’t fit into any of these special scenarios, the best mortgage type for you is likely a conventional loan. You may also want to consider an adjustable-rate mortgage (ARM), especially if you only plan to be in the home for five or seven years.
5) Understand How Mortgage Interest Rates Work
Lenders make money on mortgage loans by attaching an interest rate (and other fees). Mortgage interest rates fluctuate, sometimes daily. Depending on the type of mortgage you choose, you’ll either have a set rate over the life of the loan or the rate will adjust once a year.
Fixed-rate mortgages guarantee the same rate from year one to the final year, whether it be 10, 15, or 30 years from now. These rates are usually slightly higher than those for an ARM mortgage.
However, with an ARM, the interest rate is adjusted each year after the initial term of three, five, seven, or ten years. You may start with a low rate but end up paying drastically more years later.
If you’re certain that you’ll move, pay off the mortgage, or refinance in the next few years, an ARM makes the most sense.
6) Understand Refinancing
No matter the type of mortgage you choose, refinancing is always an option. Understanding the FHA short refinance guidelines, or those that apply to your mortgage type, can help you navigate the process. Refinancing is commonly used to:
- Cash-out equity in your home
- Shorten the loan term
- Lock in a lower interest rate
Of course, you don’t want to finance a home with the sole purpose of refinancing. However, if rates drop a percentage or if you want to switch from an ARM to a fixed-rate loan, refinancing can help you achieve just that.
Buying a house is one of the most exciting parts of being an adult. While the process of finding your dream house is fun, the mortgage process can be overwhelming.
By taking the time to understand all of the mortgage options available to you, it’s much easier to figure out which is best. Remember, owning a home is a long-term commitment and a decision that shouldn’t be made with haste!
With the right loan, you can have total confidence. Not only did you buy the perfect home, but you also financed it with the best mortgage possible.
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