As you begin to take control of your personal finances, the first course of action is paying off debt. Most people have several different kinds of debt, from credit cards to student loans, and some are more serious than others. In general, you should aim to pay off debts with the highest interest rates first. Some debts generally have fairly low interest rates, such as mortgages. Many people rightfully see a mortgage as an investment because it is a better deal, over the long term, than throwing away money on rent. With a mortgage, you are building equity. At the same time, you should select the right mortgage for your circumstances to maximize the value of your home.
Mortgages are a long-term commitment—typical loans last for 15, 20, or 30 years. Before signing any documents, it’s necessary to shop around, since mortgage terms can vary dramatically between lenders. With the wrong lender, you can end up paying much more than necessary or even come into financial trouble.
Below are some key tips for choosing the best mortgage for your needs.
1. Explore the lending landscape.
When looking for a mortgage, it’s important to pay attention to interest rates, but it’s equally critical to investigate the credibility of different lenders. Look for companies with a good, professional reputation and friendly, knowledgeable staff. In the current market, a wide number of options exist when it comes to choosing a lender. At one time, savings and loan associations served as the bedrock of home lending. While they are now relatively rare, they are often community-oriented and worth investigating. Today, mortgage bankers are more common. These professionals work for a financial institution and package loans for bank underwriters.
Some other sources of loans worth looking into include credit unions and mutual savings banks. Credit unions are member-owned financial institutions that typically have favorable interest rates. While credit unions have varying member restrictions, it is usually not too difficult to find one. Mutual savings banks are locally focused and a great option, but getting a loan from them can be a competitive process.
It’s a good idea to research any lender through the Nationwide Multistate Licensing System & Registry. The Better Business Bureau is another good source of information.
2. Ask the right questions.
Once you identify a handful of good options, you can begin narrowing your choices. With a finalized list, you can start investigating the best option for your circumstances. While the exact questions will depend on your financial history, everyone should ask about lender fees and borrowers’ responsibilities at closing, which could include credit report and application fees, appraisal costs, commissions, and loan origination fees. Some lenders will waive these fees under certain circumstances or roll them into the mortgage.
It’s also vital to ask about down payment requirements. All lenders set different policies. People looking for low down-payment options may want to check into loans backed by the Department of Agriculture, Department of Veterans Affairs, or the Federal Housing Administration.
Communication is important, so you should also ask how the lender typically communicates with borrowers, whether by phone or email, and how long typical response times are. In addition, enquire about typical timelines for preapprovals, appraisals, and closing.
3. Think about buying points.
For some borrowers, buying points makes a lot of sense. Have a conversation with brokers or mortgage lenders about how points would affect your current situation. Points are basically an opportunity to pay off interest upfront to get a lower interest rate. One point usually amounts to 1 percent of the total loan amount and could lower the interest rate up to 0.25 percent. This strategy is best for people who plan to stay in their home for a long period of time. Paying a point can ultimately save thousands of dollars over the life of the loan.
4. Compare interest rates.
Comparing interest rates involves a great deal of patience and research. The best place to start looking at different interest rates is online. A mortgage broker can help with some of the homework. Remember that the interest rates you see online are only starting points, not guaranteed rates. Before giving an official quote, organizations need to process your loan application and verify credit information.
The benefit of doing a great deal of research is that you can use this information for leverage if you want to negotiate a lower rate with a lender that you particularly like. Borrowers should keep in mind that the overall package is more than the interest rate, and saving on fees may make it worthwhile to accept a slightly higher interest rate.
5. Read the fine print.
Before signing any documents, you should know the exact amounts of your principal and interest payments, as well as how much you will be paying in points, loan origination fees, transaction fees, closing costs, and other expenses. Lenders should clearly explain what each fee covers. Sometimes, lenders will require “earnest money” to start the loan process, but the fine print may stipulate that this money is kept whether the loan is offered or the deal closes. Therefore, it’s critical to look at those details. If lenders give vague details about earnest money, it is often best to shop around.