When looking to buy a home, the most convenient way to finance the purchase is to take a mortgage. However, shopping for a mortgage can be overwhelming, and it takes deliberate efforts to know and understand precisely what the mortgage deal entails. So, it’s only logical that you brush up your knowledge on how to shop for a mortgage.
To help, we researched and compiled the important
considerations to make when shopping for a mortgage. Below are the eight
factors to think carefully about before making one of the most significant
financial decisions of your life.
- Calculate your credit score
Buying the home of your dreams is one of the biggest purchases you will ever make. It runs to the tune of six-plus figures, and it’s normal that you may wonder if the purchase is really within your financial reach. When in doubt of how much house you can afford, calculating your credit score will give you an idea.
What’s a credit score?
Your credit score is a figure that represents your creditworthiness. It’s a number that ranges between 300 and 850. The higher the figure the lower the risks associated with lending you, and vice versa.
When you do the calculations and find out that you have a reasonable credit score, many lenders will be willing to give you a mortgage. That’s to say, how much house you can afford largely depends on your credit score. So, your credit score is a major factor to consider.
- The loan size
The next logical consideration to make is the size of the loan you need to buy the property. Normally, the size that your lender approves is the amount you can raise to spend on a property. This does not necessarily mean that you have to raise the whole amount in the mortgage.
For example, if you get approved for a $100,000 mortgage, you may choose to pay a down of $20,000 from your savings then take a mortgage of $80,000. Therefore, it’s essential to know how much money you can raise so that you don’t take a big loan.
- The Interest Rate
Whenever you are applying for any loan, the lender will present you with an interest rate. Mortgage lending is not any different. You will be given a pre-determined annual percentage of the mortgage that you will pay on top of the amount lent to you. The interest rate is one of the deal-breakers when choosing a mortgage lender because the difference between the highest and the lowest interest rates would be to the tune of thousands of dollars every year. Luckily, the interest rates on mortgages change almost every other day. So, take some time to compare the interest rates and go for a deal with the lowest rate.
- Mortgage fees and closing costs
Once your mortgage is approved, your newly acquired property will go through a closing phase, which comes with many associated costs. These fees include the surveyor’s fee, land title search fees, attorney’s fees, and loan origination fees, to mention a few.
The closing costs of a new home in the US average between 2% and 5% of the loan amount. This means, on a $200,000 home purchase, you would pay from $4,000 to $10,000 in closing costs.
When shopping for a mortgage, it’s crucial to do your homework on the fees and closing costs. In doing so, you will uncover all the hidden fees and know the actual cost of the mortgage before committing. Also, find out if the lender would be willing to waiver or reduce some of the fees and costs.
- Length of the mortgage loan
Typically, a mortgage loan should be paid in regular installments over an agreed period. You must know precisely how much money you will be parting with, in monthly or annual installments, and for how many
If you want to pay the loan off in fewer years, you will pay more in
monthly installments and lower interest rates. On the other hand, if you’re
going to pay it off in a longer duration, you will pay less in monthly payments and higher interest rates. Knowing the terms of your mortgage options and comparing them against your budget will help you make the best decision.
- Fixed vs. Adjustable Interest Rates
There are two types of mortgage interest rates; fixed rates and adjustable rates. Agreeing to a fixed rate interest means that you will be paying a constant interest rate throughout the loan duration. Unlike the fixed-rate, the adjustable-rate option allows you to raise or lower the interest rate charged on your mortgage. Some lenders will allow you to pay a fixed interest rate for an agreed duration then increase or reduce the interest rates over the remaining period.
Say you take a mortgage amount of $800,000 to repay in 30 years at a fixed rate of 3.9% or a variable rate of 5.22% per annum. The blended fixed and variable monthly installments will be about $4,088.06, and the total amount of interest to be paid on the loan could be $778,316.07.
If the fixed-rate ends at the beginning of the first years then the variable rate runs for the remaining years, the monthly installments could increase to $4,394.42 for 29 years. However, if the entirety of the mortgage runs on the variable interest rate of 5.22% per year over the three decades, you will pay a total of $784,999.45 in interest alone.
Depending on your projected income over the loan term, the flexibility of interest rates is an important consideration to make when shopping for a mortgage.
- Prepayment Penalties
Your financial situation may get better in the course of the loan duration, and it may be appealing to pay off your loan sooner than the agreed period. However, this may not be an option if your loan comes with a harsh prepayment penalty. While most lenders will not impose a penalty on prepayments, you must know if your lender does before getting into the loan agreement.
For example, if you want to pay off a mortgage with a remaining principle of $200,000, at an interest rate of 6% per annum in 6 months, simply multiply the 200,000 by 0.06 = 12,000. Then, the 12,000/12 = 1,000 and then multiply the 1,000 by 6 = $6,000 in prepayment penalty.
Some banks may also impose a penalty on refinancing
the mortgage. The reason they give for this is that refinancing means you have to pre-pay the existing loan before taking a new loan—thus, the prepayment penalty. If you are not sure about the penalties around your mortgage, have an attorney go over them with you before signing the paperwork.
- Mortgage Broker vs. Mortgage Lender
The two main ways of finding a mortgage are; consulting a mortgage broker or a mortgage lender. While both the broker and the lender are in the business of helping you get a mortgage loan, they do so in very different ways. While a mortgage lender will provide you with a list of mortgage products it offers to help you finance your home purchase, a mortgage broker will help you review mortgage offers by a variety of lenders, and help you choose one that best serves your needs. It’s worth considering if you want a lender or a broker to help make this important decision.
Shopping for a mortgage for your new home will help you get the best deal to finance the purchase of the house. Regardless of whether it’s refinancing, a home equity loan, or a home purchase loan, it’s vital that you know what you are getting yourself into before signing the papers. We hope that the consideration in this post will prove helpful.
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