One of the most important financial decisions you will make in your lifetime is whether or not you want to apply for a home loan. It’s a heavy responsibility and undertaking, and even the most microscopic changes in an interest rate can cost or save you thousands of dollars over the entire term of your loan. To enjoy an affordable home, follow these seven simple steps:
1) Get ready to start shopping around! Every market has thousands of mortgage brokers, and more often than not each broker has access to hundreds of home loan programs. Whatever your financial circumstance may be, there is more than likely a home loan readily available to suit your needs. Therefore, you must be willing to speak to everyone! The more time you spend talking to mortgage brokers and financing professionals, the more likely it is that you will encounter someone who knows what type of home loan program is right for you.
2) Before you start comparing rates, pick the terms of your loan! Home loan terms range from 30–50 years and some interest rates are so high that your monthly payments won’t even begin to make a dent in your mortgage. Another factor to consider when picking the terms of your loan is the rate. There are two types of rates that you may encounter — fixed rate mortgage and adjustable rate mortgage. Fixed Rate Mortgages (FRMs) are an interest percentage that is set and guaranteed for the entire term of your mortgage; you just set it and forget it. Having an Adjustable Rate Mortgage (ARMs) means that your interest rate will adjust after a guaranteed rate period is over. When it comes to deciding on terms, you should also think about what penalty you are willing to accept for pre-payment. This penalty is usually applied to you if you are choosing to refinance your home loan or selling the house within a specific period.
3) Keep shopping and check in on closing costs! At this point, you should already be speaking to a mortgage broker. A crucial step to take to receive the information you need to make a proper decision is getting the mortgage broker to provide you with a copy of the tri-merge credit report. Take this tri-merge credit report and a copy of your tax returns with you when visiting financing professionals. This assures you will be fully prepared to answer all questions the mortgage broker may ask honestly.
QUICK TIP: Ask for two Good Faith Estimates (GFEs), one with minimal closing costs and one with standard closing costs.
4) It is now time to compare all total monthly payments. Your GFEs will provide you with a total for the monthly payments on your home loan. Always remember that these are estimates only and not exact. These estimates will cover everything from your taxes, hazard insurance, homeowner’s association dues, and other costs. Since mortgage brokers and financiers have no control over these costs, some will underestimate them to make their GFEs more attractive, do not sign anything until you have read and understood everything fully.
QUICK TIP: Always compare the line item costs associated with each loan provided. A line item’s price would most commonly include principal, interest, and mortgage insurance.
5) There is another cost to consider while shopping for the right loan ¬ — closing costs. Closing costs can contribute significantly to the price of buying a home. Some mortgage brokers will underestimate these costs to make an estimate seem competitive. Most of the time these closing costs and other fees have confusing jargon that is hard to read or understand, so take your time in your research. Always compare these costs to the GFEs that you received earlier!
6) Now it is time to lock your rate! The interest rate for home loans is always changing.
Therefore, when quoted an excellent interest rate, this does not necessarily guarantee the interest rate will stay in place until you are ready to buy.
QUICK TIP: Lock in your interest rate 30¬–45 days before your purchase! Deciding to buy a home is exciting but choosing a mortgage/home loan can be nerve-wracking. To make a smart choice that will continue to support you financially, be sure to compare slowly and efficiently by following these tips. Then, you can finally enjoy your new home with the right financing.