Understanding the Importance of Your Mortgage
The most important aspect of your home purchase is the mortgage you obtain. The loan amount depends on the home’s price and your down payment.
Determining Your Loan Amount
Your down payment and income-to-debt ratio determine the homes you can afford and the loan size you need. Lenders analyze your income to assess your ability to repay the loan. A general guideline: your loan payment should be 25% to 33% of your gross pre-tax monthly income.
Interest Rates and Loan Terms
The interest rate and principal amount of the mortgage determine your monthly payments. Higher interest rates result in higher payments. Most real estate loans have terms of 15 or 30 years. Loans fall into two basic categories:
- Fixed Interest Rates and Payments
- Variable Interest Rates and Payments
Fixed Rate Mortgages
A Fixed Rate Mortgage provides a consistent monthly payment throughout the loan’s life. This means your housing costs remain stable, making budgeting easier. Interest rates on these loans are usually slightly higher than adjustable loans because the lender commits to a set rate for many years.
Adjustable Rate Mortgages (ARMs)
Adjustable Rate Mortgages offer lower initial interest rates and corresponding lower monthly payments at the start. Rates can increase (or decrease) over time, as the loan includes periodic interest rate adjustments.
Key Points to Consider:
- Interest-Rate Caps: Look for the presence or absence of interest-rate “caps.”
- Life-of-the-Loan Caps: Set a ceiling on how high the rate can go over the term, often five to six percentage points above the original rate. This guarantees you won’t pay more than the agreed maximum interest rate.
- Annual Caps: Protect you from significant rate jumps in any given year, usually limiting increases to one or two percent.
Shopping for a Loan
Shop around for your loan. Don’t hesitate to ask questions and compare different loans. Since you’ll be living with it for many years, ensure you get one that fits your financial situation best.
Comparing Loan Programs and Rates
Look at loan programs and rates offered by several lenders. If you find a lender offering a 6.25% rate when others charge more, you’ll save interest over the life of a 30-year loan.
Utilize Online Resources and Mortgage Brokers
Comparison-shop online to reduce your search time. Work with a mortgage broker who arranges loans from many institutions. If you contact several lenders yourself, choosing a mortgage can take weeks.
Tips for Thorough Loan Comparison
- Compare Multiple Lenders: Evaluate at least six lenders or mortgage brokers. One of them is bound to offer the best loan for you.
- Look Beyond Interest Rates: Getting a low rate is important, but it won’t benefit you if you pay too many upfront points and fees.
- Understand Points and Rates: A point is prepaid interest; each point equals 1% of your loan amount. For example, on a $100,000 loan, paying 3 points means $3,000 in points. The more points you pay, the lower the rate you’ll get.
- Consider Your Time Frame: If you plan to move in a few years, consider an adjustable-rate mortgage—you may sell before the rate increases. If you plan to stay longer, a fixed-rate mortgage might be better because your rate stays the same.
Submitting Your Loan Application
When you submit your loan application online or in person, the lender reviews your application information, credit report, property details, and proposed down payment to assess your ability to repay.
If you’re already pre-qualified for the mortgage, the lender may approve the application and complete the loan within a couple of weeks. Otherwise, loan approval can take one or two months.
Tips to Improve Loan Approval Chances
- Complete the Application Fully: The lender needs all information to determine your creditworthiness.
- Respond Promptly: Don’t delay when the lender requests additional documentation. Obtain the documents yourself and deliver them quickly.
- Maintain Financial Stability: Avoid new debts or large purchases. Before closing, the lender may check your credit report and bank accounts to ensure your financial situation hasn’t changed.
- Ensure a Proper Appraisal: The lender will order an appraisal to confirm the property’s value. If the appraisal is too low, you can challenge it to prevent the deal from collapsing.