How to Find the Right Mortgage for You
The home buying process can be intimidating. Papers, lawyers, realtors, opinions, not to mention the amount of money you’re about to spend. It can be a bit much.
Luckily, this article will help take some of the pressure off you.
Selecting the right mortgage comes down to personal preferences and goals. Do you want a traditional 30-year fixed or something a little shorter? Variable rates might fit your needs better.
We’ll cover all things mortgages, giving you the data to make an informed decision.
Length of the Loan
First and the most straightforward, how long of a loan do you want? You’ll find the following lengths:
- 30-year
- 20-year
- 15-year
- 10-year
Now there might be one-off type lengths for promotional reasons, but these are what you’ll find. When determining the length of your loan you’ll want to know these 2 things.
First, the shorter your loan the higher the interest rate will be. This is because the lender needs to maintain margins over a shorter period of time.
Then, you can always refinance, after living in your home for several years.
Beyond that, the length of a loan is fairly cut and dry. The longer the loan the smaller the payment. Be sure to calculate interest as well, it can be sneaky.
If you ever have questions, find a neutral party to run the numbers so you can compare your options.
Down Payment
Moving on to an important factor in the mortgage process, your down payment. Traditionally, it’s been 20% for a 30-year fixed rate mortgage and call it a day.
Not anymore.
A more realistic approach to take is 10% down. If you truly want to cut corners you could even get away with 5% in some cases, especially for first time homebuyers.
Now, one thing you have to keep in mind is the loan-to-value ratio. It’s the amount of money borrowed against the house.
For example, if you have a $95,000 loan on a $100,000 house, that’s 95% loan-to-value. Why is that important you ask? Well…you may run into problems.
If you flirt with 5% down you may be required to put a little more down. Most lenders want to stay as far under 95% LTV as possible. You can ask your lender their policy on LTV and they should be happy to disclose that information.
The more money you put down the less you need to borrow. In turn, you save on interest.
Ideally you want to shoot for 10% down. 5% is a bare minimum, and anything above 10% is excellent. Also, how much you put down may limit your loan length options. Each lender’s different so shop around.
Interest Rate
The number everyone pays attention to — the interest rate. Luckily, at the time of this writing you can get mortgages sub 3%. Lowest I’ve heard of is about 2.6%. You won’t find much lower simply because lenders need to eat too.
Interest rates tend to be a measure of risk. The riskier you appear, the higher the rate. Factors that impact your interest rate include:
- Credit score & history
- Income
- Length of loan
- Down payment
- Shopping around (have two lenders compete for your biz)
Maybe we’ll dive deeper in another article, but essentially you want the lowest rate possible. Take your time and shop around. There are endless lenders. From online to brick & mortar locations, make them earn your business.
For a 30-year fixed you want anything under 4%, 3.5% if you’re feeling competitive. A shorter loan will be slightly higher, but not much.
Also, if you take out a loan and want to refinance later, it can lower your monthly payment.
Fixed vs Adjustable
Last is the fixed versus adjustable debate.
As you might already know, a fixed rate mortgage means your rate is locked. Adjustable means it’ll adjust at pre-set dates in the future if the underlying index moves.
Right now, during this writing, interest rates will be as low as they’ll ever be (most likely). Essentially rates will only increase, making adjustables much less attractive.
Not only that, fixed rate mortgages can make future financial planning much simpler.
For first time homebuyers, you might find attractive adjustable rate products. The risk here is the rate adjusts up before you get a chance to refinance into a fixed rate loan later.
In short, fixed rate mortgages are certain. Adjustable mortgages add a little uncertainty to your personal finances. Ultimately it’s up to you.
Now you’re set to begin finding the right mortgage for you! Be sure to always ask questions, no matter how simple it seems. Your lender should be willing to help and be transparent. Shop around and negotiate the lowest rate possible.
Do those things and you’ll be in a good spot.
I write engaging finance articles without the confusing jargon by simplifying intimidating topics for easy consumption.
Interested in working together? Send me an email at nyoungfreelancing@gmail.com.
Thanks for reading!
