5 Tips for Choosing the Right Mortgage

Buying a new home is one of the most exciting times of your life. You’re ready to move to a new neighborhood. You’re ready to find the perfect place to build a life.

Of course, it takes a little more than finding the right number of bedrooms and bathrooms or selecting curb appeal that appeals to you. Before you can dive in and start living your life, a lot of work has to be done.

The selection process can be tedious. But on some level, dreaming when you’re standing inside a potential kitchen is fun. Imagining yourself playing in the backyard with your kids is exciting.

Paying the mortgage payment each month? Not so much.

But it can be … if you know you received the best deal you possibly could.

Unfortunately, too many home buyers take the “head down” approach. They dream about the house, and never consider payment options. They spend just enough time to get approval, without ever considering if they’re getting the best deal for their situation.

This is probably the largest debt you’ll ever take on. And if you don’t understand it, how do you know if it’s the right step for you? The financial crisis of 2008 proved a lot of people didn’t make the right choices; why not spend a few minutes understanding your options first?

With a few simple questions, you can find choosing the right mortgage to be as easy as 1, 2, 3, 4, and 5.

1. What type of mortgage is best?

Your first step will be to find out how much you can borrow. Mortgage lenders typically lend four to five times individual income, or three to four times joint income if you apply for a mortgage together. Of course, every lender has its own set of rules; check with a lender early to learn your options before you start looking.

How much you can borrow coupled with the size of the mortgage you are looking for will determine what kind of loan you want. There are many different options, including loans designed for first-time homeowners with low down payment options and for buyers purchasing large homes. Choosing the right mortgage depends on your lifestyle.

A conventional mortgage is probably the most known and most widely used. These loans are available from a variety of institutions, including mortgage lenders, banks, and credit unions. You’ll find these are used most frequently for well-established borrowers with good credit. If your FICO score is 670 or higher, on a scale of 300 to 850, you may fall under the guidelines that make this type of loan viable.

While a conventional mortgage may be the most popular among homebuyers, when it comes to purchasing your first home, FHA loans often rise to the top. An FHA loan is insured or guaranteed by the Federal Housing Administration. Because the federal guarantee gives lending institutions more leeway in issuing the loan, the lender can offer a little more flexibility with who can qualify. The minimum down payment requirement is less and can often be paid in different ways, such as a gift from a family member or even from the seller of the home.

A VA loan may be available to qualifying veterans. These loans are guaranteed by the US Department of Veterans Affairs, making them easier to qualify for and under more favorable terms. VA loans don’t require down payments, and the VA doesn’t impose the same credit score requirements. Homebuyers often won’t have to pay for private mortgage insurance, making this one of the most affordable options for those that qualify.

A jumbo loan is considered to be jumbo if it exceeds the loan-servicing limits established by the federal government. The 2019 limit is $484,350, meaning any home mortgage loan over this amount will require a jumbo loan instead of one of the other methods. These often charge a slightly higher interest rate and have different loan requirements, depending on the institution.

2. How should my loan be structured?

When you apply for a loan, you’ll need to decide the terms and how much interest will be charged. You’ll also make decisions about the payment schedule and how much you’ll pay each month.

Fixed-rate mortgages are considered the safest option for most buyers. When you agree to a fixed-rate loan, you will have your interest rate stay the same throughout the entire term of the loan. Your monthly payment will never change over the life of the loan. The monthly payment is derived based on the amount of money you’ve borrowed, the interest rate you’ve agreed upon, and the length of your loan. There are no surprises down the road.

An adjustable-rate mortgage provides a lower upfront interest rate, but it adjusts on a sliding scale over the life of your load, based on current interest rates. A five-year adjustable-rate mortgage, for example, has the potential to adjust the current interest rate every five years, depending on current rates. It can fluctuate up or down at the specified intervals. This puts you at some risk, depending on how well the economy is doing.

If you go with this kind of loan, be sure you understand how much the rates can rise. Lenders are required to disclose the maximum monthly payment you will pay if your interest rate does hit the maximum level. You should have enough money to absorb the differences just in case.

3. How long should the loan term be?

As you’re choosing the right mortgage, you’ll have the opportunity to select how long of a loan you want. This is the number of years you’ll take to repay the mortgage loan. In most cases, you’ll select from a 15 year or a 30 year.

A 15-year mortgage requires you to pay off the loan in 15 years. The interest rates are usually a little lower than the 30-year because the money won’t be tied up for as long—which means it comes with less risk. But because you’ll be paying off the loan in a shorter time, the payments will be higher. And depending on how much outward cashflow you have in your household, those higher payments might prevent you from putting your money elsewhere, such as in a retirement fund, or even in education for your kids.

It’s a personal choice, one your mortgage lender can help you weigh so you can select the right term for you.

4. What are the fees and costs?

Different lenders offer various mortgage loans. And with every mortgage comes a variety of fees and costs. Once you know what type of loan you want, ask lenders for quotes. This will help you look at interest rates and at fees charged for servicing the loan.

For example, you’ll pay for things like an inspection, a home appraisal, and a credit report. Survey and title insurance are also in the loop. Look carefully at how many points you’ll pay—this is an upfront fee to lower your interest rate. The longer you plan on living in a place, the more sense it makes to get the lowest interest rate possible.

5. Should I worry about prepayment penalties?

Finally, check with the lender to ensure you won’t have a penalty payment due if you pay the loan off early. The last thing you need is to become trapped in a mortgage. Whether you decide to refinance it for better terms, or simply move to another home, be sure you can do so whenever you choose.

Have additional questions about choosing the right mortgage for your situation? Central Willamette Credit Union can help. Let’s talk today.