Finding a Mortgage
Getting a mortgage is a time-consuming process, but, considering that it will usually be paid over 15 or 30 years, it is worth a great deal of effort to save money in the long run. It is important to have a good handle on your personal finances and credit situation before trying to obtain a mortgage. Lenders will review this information carefully, so it's a good idea to make sure everything is in order beforehand.
Lenders offer mortgages at a variety of rates that are constantly changing due to economic fluctuations and other factors. Shopping around for a good rate from a quality lender is a crucial step. Mortgage brokers provide the service of tracking rates from a variety of lenders and may be able to help identify which lenders can offer the best rate for a given borrower's situation. Keep in mind that the broker will charge a percentage of the final mortgage amount as a fee at closing.
There are a range of options from which you must select before choosing a mortgage, including interest rate type, points, and term, all of which are described below. Different options are better for different financial situations, so you should carefully consider your options before making a choice.
Types of Interest Rates
Fixed vs Adjustable Rate
Mortgages can have fixed or adjustable interest rates.
- A fixed rate mortgage has the same interest rate for the duration of the loan. Obviously, this is preferable when interest rates are low enough that you would not mind paying them for the duration of your mortgage. If interest rates drop, you can refinance the loan, but the accompanying fees provide a significant barrier to doing so.
- An adjustable rate mortgage has a fluctuating interest rate tied to a rate index, meaning that the rate will change based on the state of the economy and other factors. This is usually a better option for a buyer who will be selling after only a short time because the initial rate is lower than a fixed-rate mortgage. There are also hybrid mortgages that have a fixed-rate for a portion of the term and an adjustable rate for the remainder.
Interest Rate "Points"
You also have the option to pay more money up front in order to reduce the interest rate on your mortgage. This is known as paying "points". Each point is equal to one percent of the size of the loan. Points are a good option for buyers planning to live in the home for a long time because the interest rate can be reduced significantly. For short-term buyers, however, points add to the closing costs and do not provide much benefit in the short run.
Mortgage Term Options
Finally, there is a choice of the duration (or "term") of the mortgage. The two most popular options are 30 years and 15 years. The longer term will require you to pay much more money in interest over the course of the loan, but the monthly payments will be somewhat smaller and there are some tax benefits to paying mortgage interest. The interest rate will be slightly lower for a 15-year mortgage, but the monthly payments will be higher - though not nearly twice as high. Of course, the equity ownership will increase much faster with the shorter term option; in other words, you'll own more of your home sooner. Another option, when there is no pre-payment penalty, is to opt for the longer term and then make payments as if it was a 15-year mortgage. This allows for the flexibility of reducing payments when necessary and the benefits of paying off the mortgage faster. The only downside is the slightly higher interest rate.
Steps to Getting Pre-Approved for a Mortgage
The first step to getting a mortgage is pre-qualification. This is simply the process by which the lender determines the maximum amount of money that you qualify to be lent. You must provide the lender with information such as income, debt, assets, and size of down payment in order for the lender to come up with a figure. Other factors that the lender will take into consideration include credit history, time with current employer and availability of a cosigner. None of these items are verified at the time of pre-qualification, meaning that nothing is guaranteed.
Credit history is one of the most important factors involved in getting a loan. You can request a copy of your credit report to insure that it is accurate . It will list your personal information as well the credit lines currently in your name. Also listed will be risk factors like late payments or a recent bankruptcy.
It is also possible to get pre-approved for a mortgage, which enables you to lock in an interest rate. Of course, before that can happen, all of the information from the pre-qualification must be verified. There are fees associated with pre-approval, but it can speed up the process of making an offer on a house, which may be useful if the housing market is exceptionally tight.
Mortgage Down Payments
In most cases, the down payment for a mortgage will be around 20% of the cost of the house. A larger down payment may qualify you for a larger loan. There are a variety of options for people who cannot afford a down payment of this size. Several government agencies such as the Federal Housing Administration (FHA), Freddie Mac and Fannie Mae offer loans with low down payments. Another option is to take money out of an IRA . First-time homebuyers are allowed to take up to $10,000 out of an IRA without penalty, but taxes must be paid on the withdrawal. The holder of the IRA can also be a relative of the buyer (parent, grandparent or child) and the exemption is per person, not per purchase. The parents of the buyer can also give another $11,000 each per year without triggering the gift tax.