For most people, there is no more significant a financial transaction in their lifetime than that of a mortgage loan. Despite its importance, getting a mortgage is infrequent enough for the average person that it can be a daunting process. However, it doesn’t have to be that way. In this series we are going through each step on the way to getting your mortgage to better help you be prepared for the process!
We have discussed how reviewing your finances is an important first step toward applying for a mortgage. The next step is to determine what kind of mortgage is the right one for you. If you didn’t know there were multiple kinds, you are in the right spot!
The industry standard is the 30-year fixed mortgage. Chances are good that your parents or grandparents had this kind of loan on their home, and it might be right for you. However, it is unwise to make that choice without reviewing the alternatives. Many factors may be involved in that decision, and we’re going to talk about them.
Since you already know what you can afford (if you followed the first step), you are in a good spot to get started making your decision. The first thing you’ll want to consider is loan length. If your budget allows, a 15-year mortgage is a worthwhile alternative to consider to the normal 30-year mortgage. A substantial savings in interest can be had by going this route, and for many, cutting down that commitment will be appealing.
Down payments must be weighed in your decision-making process as well. Many loans require a 20% down payment in order to qualify. If you don’t have that available, you’ll need to decide on whether to postpone a home purchase until that is possible, or potentially seek out alternative loan types. It should be noted that expenses like private mortgage insurance can raise your overall monthly payment on a loan if you are unable to put enough money down.
In addition to loan length and down payment, you’ll need to examine the right type of loan for you. For those with military connections, you’ll want to investigate VA loans. Rural and suburban areas have loan programs that are specific to them, and those can sometimes offer home buying options that require lower money down. Those with poor credit history and a lower credit score may not be able to obtain a conventional loan, but FHA loans may offer a possible route to a mortgage loan.
The last thing you need to consider is whether you’ll pursue a fixed or adjustable-rate mortgage. A fixed-rate mortgage means just what it says. The rate you get at approval is your rate for the lifetime of the mortgage. This can benefit you in situations like we find ourselves currently, where mortgage rates are very low.
Adjustable-rate mortgages are a fine option if mortgage rates are higher when you are looking to buy. These begin with an initial term where the rate stays the same, and after that period, the rate resets annually with the market. That means that while you might take out a mortgage under a higher rate, you get the benefit of a lower rate if the market changes in your favor. Unfortunately, it also means that if you have a good rate to begin and interest rates climb, you may find yourself paying more as time goes on.
Next step: Choosing a lender