Shopping for a mortgage probably doesn’t spark the same joy as finding a great deal on a new pair of shoes, a shiny smartphone, or a cutting-edge big-screen TV. The thought of decoding complex jargon and submitting multiple applications can feel more like a chore than a thrilling bargain hunt.
But don’t despair! You can absolutely make this process as smooth and stress-free as possible.
Six Steps to Finding Your Perfect Mortgage
1. Pinpoint Your Affordability
Buying a home is a huge financial commitment, so it’s natural to wonder if it’s truly within your reach. A mortgage affordability calculator can be a great starting point to help you figure out just how much house you can realistically take on.
Keep in mind that lenders, especially if you have a strong credit score, might offer you a loan for a more expensive home than you initially anticipated. But remember, their goal is to sell you a loan; your goal is to comfortably pay it back. So, be sure to leave some wiggle room in your budget for all of life’s other essentials and enjoyments.
2. Set Your Savings Target for Upfront Costs
Lenders want to see that you not only qualify for a loan but also have sufficient funds for the down payment and the extensive list of closing costs.
While the down payment might seem like a daunting sum, contributing as much as you comfortably can offers a significant advantage. It immediately builds home equity, providing a financial cushion. Without a substantial down payment, even a slight dip in the real estate market could leave you with a large loan on a home that’s worth less than you owe.
3. Consider the Loan Term Length
When you hear “30-year mortgage,” it definitely sounds like a long-haul commitment. However, you also have options like 10- or 15-year loans, and some lenders even offer various custom lengths.
If your budget allows for the higher monthly payments of a shorter-term loan, you’ll likely reap two major rewards: a substantial reduction in the total interest paid over the life of the mortgage and often a better interest rate from the get-go.
4. Select the Right Mortgage Type
This is where many articles dive into confusing jargon, but let’s keep it simple. There are specific loan types tailored for certain borrowers:
- VA loans for those with a military connection.
- USDA loans if you’re looking to live in a rural or suburban area.
- FHA loans for individuals with a lower credit score.
- Jumbo loans if you’re buying a home that exceeds standard loan guidelines.
If none of these descriptions fit you, chances are you’ll be a good candidate for the conventional loans that most lenders prefer.
5. Understand How Mortgage Interest Rates Work
The interest rate – the price you pay to borrow the money for your home – is another critical factor in choosing the best mortgage. Mortgage rates can be quite volatile. Without getting overly technical, here’s what you need to know: you can either lock in your interest rate for the entire loan term, or you can opt for a rate that fluctuates with market changes, often adjusting twice a year.
A fixed-rate mortgage, which guarantees your interest rate for the life of the loan, might start out a bit higher than an adjustable-rate mortgage (ARM). However, the ARM’s initially lower rate, which typically resets semi-annually after an introductory period (often three, five, seven, or 10 years), can go up or down.
If you’re confident you’ll move, refinance, or pay off the mortgage before the guaranteed initial period of an ARM expires, it could be a smart choice. But, if you plan to stay in the home beyond that introductory phase and decide you want to refinance into a fixed rate, you might find that interest rates have climbed significantly by then.
6. Shop Lenders Like a Savvy Bargain-Hunter
We’ve saved the most crucial tip for last: compare offers from at least three different lenders. Approach this like you would any product you love to bargain-hunt for.
Think of it this way: the money you save on your home loan by securing the best mortgage rate and the lowest origination fee could easily buy you a mountain of shoes, a handful of new smartphones, and a collection of big-screen TVs!