Finding your dream home is only half the battle in becoming a homeowner. Unless you’re paying in cash, you’ll need to figure out the best type of mortgage for your specific needs.
Because you’ll be paying your mortgage for several years, finding a home loan that best meets your needs and budget is important. Remember, when you take out a mortgage loan, you’re borrowing money that you legally agree to pay back.
Keep reading to learn all of the factors to consider when choosing the best mortgage.
Most homes are within the five to six figures. Seeing such big numbers may make you really start to wonder how much you can comfortably afford.
Use our mortgage calculator to get a rough estimate of what you can expect to pay each month.
And most importantly, don’t put yourself in a position where you have a hard time meeting your financial requirements for food and other expenses. It would be best to spend no more than 30% of your gross income on housing costs as a rule of thumb.
Lenders not only look at whether you can qualify for the loan amount you requested but also at whether you have funds in the bank to cover closing costs along with the down payment.
For most home buyers, the down payment is always the biggest hurdle. However, it’s in your best interest to put as much down as possible. This way, your mortgage payments will be lower.
One of the most important factors to consider when choosing a mortgage lender is the required upfront costs that you must pay. These closing costs can make up 5% of your total mortgage.
» MORE: Find the best mortgage lenders
Most homebuyers take out a mortgage loan with a 30-year term. If you don’t want to commit to staying in a home for three decades, there are other options to consider.
Lenders also offer 10-year fixed-rate mortgages as well as 15-year fixed-rate mortgages. Some even have varying loan lengths that are customized to your specific needs.
If you can swing a bigger payment each month, choose a loan with a shorter loan term. You’ll not only get a better mortgage interest rate, but you’ll pay much less towards interest.
There are many different types of mortgage loans to choose from. Some of the most popular mortgage types include:
If you don’t fit into these special scenarios, the best mortgage type is likely a conventional loan. You may also want to consider an adjustable-rate mortgage (ARM), especially if you only plan to be in the home for five or seven years.
Lenders make money on mortgage loans by attaching an interest rate (and other fees). Mortgage interest rates fluctuate, sometimes daily. Depending on the type of mortgage you choose, you’ll either have a set rate over the life of the loan or the rate will adjust once a year.
Fixed-rate mortgages guarantee the same rate from year one to the final year, whether it be 10, 15, or 30 years from now. These rates are usually slightly higher than those for an ARM mortgage.
However, with an ARM, the low rate resets each year after the initial term of three, five, seven, or ten years.
If you’re certain that you’ll move, pay off the mortgage, or refinance, an ARM makes the most sense. However, you take the gamble on interest rates remaining low during the periods you have an ARM.
No matter the type of mortgage you choose, refinancing is always an option. Understanding refinancing guidelines or those that apply to your mortgage type can help you navigate the process. Refinancing is commonly used to:
Of course, you don’t want to finance a home with the sole purpose of refinancing. If interest rates drop or if you want to switch from an ARM to a fixed-rate loan, refinancing can help you reduce your monthly payments.
» Looking to refinance? See our best mortgage refinance lenders
While the process of finding your dream house can be enjoyable, the mortgage process can get challenging.
By taking the time to understand all of the mortgage options available to you, it’s much easier to figure out which is the best solution for you. Remember, owning a home is a long-term commitment and is a decision that shouldn’t be made with haste!
With the right loan, you can have total confidence. Not only did you buy the perfect home, but you also financed it with the best mortgage possible.