How to identify the perfect mortgage
Every day, home buyers make a big mistake-they don't comparison shop for mortgages the way they do for other products, which is a shame. When buying a home, finding the right mortgage is every bit as important as finding the perfect place to live. A mortgage is probably the biggest investment you will ever make, and the loan type and interest rate you end up with will have a huge impact on your future finances. Before signing for a mortgage, you should carefully consider all your options, and follow these tips on how to identify the perfect mortgage.
Mortgages go through different stages. Before you begin the home-buying process, you can get preapproval for a loan; just call a local bank, answer some questions about your personal finances, and the kind of home you are looking for. The bank will provide you with a letter that tells realtors and home sellers that you will be able to pay a mortgage up to a set amount. Prequalification doesn't mean approval all the time, but they go a long way in easing the seller's fears. After you put in an offer, you can still get preapproved, but you will need to put in an application and allow the bank to check your credit and do some research on the home you chose. If everything is OK, they will approve your application and you can begin the closing process.
The type of mortgage loan you choose also makes a big difference. There are four types of loans: FHA, VA, conventional and jumbo mortgages. The first step should be to find out which type of loan you are qualified for and which best suits your situation. Each loan type has pros and cons, as well. VA loans are guaranteed by the government, they require almost no down payment, but only veterans who qualify can get them. FHA loans are also government-backed, and they require a small down payment. These are great for those that don't have a lot of cash, but if you get one of these, you will have to buy PMI, which covers the loan if you default. Conventional loans require a 20% down payment and no PMI; they are your best bet if you have enough money to pay the down payment and any closing costs. Last, jumbo mortgages can be used if your loan exceeds lending limits; they carry a lot of restrictions.
When choosing a mortgage you also need to think about repayment. You can get a fixed-rate loan or an adjustable rate mortgage (ARM). Fixed rate loans are a safe bet for those that plan to stay in their home for a long time, and if you choose a shorter-term loan you will pay less interest. ARMs can also save you money if you only plan to be there a few years; they have lower interest rates for the first few years but will adjust after that. If you are still in the home at that time, your payment could sharply increase, but many buyers are willing to take the risk.
Getting a good interest rate is also part of identifying the perfect mortgage. Before calling lenders, find out the latest rates. If the average is around 4.5% and you're offered 5%, you have room to bargain with the lender. The closer an offer is to the national average, the less the lender profits. Get at least four quotes online or by phone, and be sure to get quotes on comparable loans. Ask each lender how many points you will need to pay in order to get the advertised rate. Points are interest that you prepay, and each point is equal to 1% of the amount of the loan. The more you pay upfront, the lower the rate you will get.
Many people use "interest rate" and "APR" interchangeably, but they are different. The APR is the cost of getting the loan, including interest, broker and other fees, and points. The lower the APR, the better deal you will get. Once you find the perfect mortgage and you are preapproved, you can ask the lender to lock the rate in. That means even if rates rise, you can get the mortgage at the lower rate. However, if rates fall, the same applies and you will pay the higher rate.
There are a lot of different ways to find a mortgage. You can go through an independent lender, or you can start by calling local banks. Whichever way you decide to go, you should try more than one method, and realize that in the beginning you are under no obligation. Try not to confuse yourself with the myriad of options that are available, but be sure to do your research because it will help you identify the perfect mortgage.
