Not every mortgage is created the same and your options may not be as limited as you think. As someone looking for a mortgage loan for the first time, you may feel as if your chances are not very good with most lenders. Fortunately, this isn’t true. You can shop around for a mortgage loan so that you can find out what your loan should cost you. In the meantime, you can find out how discount points, the loan term, and the loan type will affect you financially. Nonetheless, you do need to know what to look for so that you know how to compare to ensure you are getting the best deal.
The first thing you need to know is what mortgage options are available to you. Knowing what the options are before you speak with the lender can equip you with the knowledge you need to make the right choice. These options include 15-year and 30-year fixed-rate mortgages, as well as adjustable rate mortgages. While 15 and 30 year terms are the most common, there are some lenders that may offer other term lengths. The following are explanations of the most common mortgage types:
1. 15-year fixed-rate mortgage
The 15-year fixed-rate mortgage allows you to own your home in a 15 year period. If you purchase a home before having children or when they are young, you could own your home before they graduate high school. This means you can own your home 100% before you are even close to retirement.
What makes this mortgage so much different than a longer term mortgage, however, is that you pay a lot less in fixed interest over the loan period, but the monthly payment is a lot higher. For those that can afford the monthly payment, this is an excellent choice to make. Nonetheless, qualifying for this type of loan can be difficult for some individuals because the income requirement will be higher than that of a longer term loan.
2. 30-year fixed-rate mortgage
The 30-year fixed-rate mortgage is the oldest and most common type of mortgage. A person has 30 years to pay off their mortgage at a fixed interest rate. Because the interest rate is fixed, the payments remain the same throughout the term of the loan. When compared to the 15-year fixed-rate mortgage, the monthly payment is less. In fact, the monthly payments over a 30-year term would be half that of a 15-year term. This means the income requirement is not going to be as strict on a 30-year term, which makes this loan easier to acquire.
3. Adjustable rate mortgage (ARM)
Individuals choose adjustable rate mortgages because the interest rates and the mortgage payments are low in the beginning. The borrower is agreeing to assume any risk associated with changing interest rates. For most people, they feel that their earning potential is going to grow along with their payments throughout the term of the loan. In other words, they feel they can handle the changes.
As for how these rate changes occur, the interest rate is adjusted based upon a specific interest rate index. You should receive an ARM disclosure from your lender that specifies when these increases will occur, which will tell you when to expect the payment increase. You’ll notice in this disclosure that the rate has a life cap, a floor cap, and a payment cap. This makes this type of loan ideal for those homeowners that plan on selling their homes or refinancing before the interest rate increases.
If you do opt for the ARM, you must know that economic fluctuations can present some issues, but there may be a solution to make the loan more affordable. One solution is to opt into an interest-only option where you pay only the interest for a period of time, but the actual loan balance does not decrease. You can choose to make payments toward the principal at any time during this interest-only period, but monthly payments can go up sharply later.
Where to Shop Around
So now that you are aware of the different types of mortgages, it is good to know where you can go to shop around. Many people feel that they are limited on where to shop, which is just the result of not knowing that mortgage lending goes beyond the community savings and loan. Here are some places you can shop around:
- Credit Unions
- Homebuyer programs for first-time homebuyers
- Government programs, such as VA and FHA loans
- A mortgage broker who can search the market for the best loan
- Subprime mortgage lenders
As you can see, there are a number of ways you can find the mortgage that fits your unique situation. When it comes to subprime mortgage lenders, however, this should be a last resort. The reason is because the interest rate can be very high. You can refinance later, but you will spend a lot of excess in the way of interest between the time you take out the loan and the time you can refinance. Some individuals choose to wait to acquire a mortgage until their credit rating improves if they are able to do so or will shop around for a lender that will give them a chance at a competitive interest rate.
Also when shopping around, it is good to know how mortgage points work because you can benefit from this knowledge. You need to know that one point is equal to 1% of the loan’s total value. A $200,000 loan is going to have a point value of $2,000. This matters because you can buy mortgage points to get a lower interest rate.
For instance, you may have a higher payment than you would like to have. You have two choices: Give up on the loan or buy your points. If you buy some of the points on a $200,000 loan with an interest rate of 6% in addition to closing costs, you can reduce your payment to something you can afford. If you do not have the means to make this payment, then you know that you will need to find a home that will cost less so that the payments are within an affordable range.
In the end, it is all about narrowing down your options. When you shop around, you can get a general idea of what is a good mortgage and what is a bad mortgage. You can also look at the different loan terms to see what you can and cannot afford. Even seeing how buying mortgage points in advance can affect monthly payment can influence how long you finance and/or the home that you buy. While this seems like a lot to evaluate, these are all factors that can help you find a mortgage that you can live with comfortably for the next 15 to 30 years.