How To Decide What Kind Of Mortgage Loan Is Right For You
Taking out a mortgage is one of the most expensive loans a person acquires in their lifetime, so picking the perfect one is a crucial step in the home-buying process. Not everyone who buys a house needs a mortgage to do so, but for the near 70% of Americans who do, per Policy Advice, the decision greatly impacts the next several years of their lives. In other words, this decision shouldn't be taken lightly.
With so many types of mortgage loans available for borrowers to take advantage of, determining which loan best suits your personal financial situation may seem overwhelming. That's why it is important to learn as much as you can about the options at your disposal and to retrieve secondary opinions from sources you trust regarding your best course of action. If you're looking to buy a house, but don't know much about the lending process, here are five tips to help you decide which mortgage loan is best for you.
Familiarize yourself with mortgage lingo
Before delving into the world of mortgage rates and principles, it's important to work out all of the complex terminology commonly used in the mortgage industry. It's common for potential homebuyers to walk into the lending process completely blindsided. In fact, according to data from a survey conducted by OnePoll (via The Truth About Mortgage), around half of Americans do not know what a mortgage is, or at the very least, could not correctly define the term in the format of a multiple-choice question. Unsurprisingly, many of these respondents also answered other questions about the borrowing process incorrectly. Surveyed participants failed to understand the concept of refinancing and misinterpreted the regulations behind a lender going bankrupt. Entering the mortgage application process with a basic knowledge of lending at a minimum is important to ensure you aren't setting yourself up for financial hardship in the future.
Some mortgage terms are self-explanatory, while others require a little more effort to understand, and maybe a bit of math to calculate. Luckily, there are many resources available online that break down the components of a mortgage, as well as the steps needed to be approved for one. The Consumer Financial Protection Bureau offers a comprehensive list of terms you should recognize when applying for a mortgage loan. Banks and private lenders also tend to provide their own shares of web-based educational materials for the general public to use when preparing to buy or refinance a house.
Understand your financial situation
Once you grasp the ins and outs of a mortgage loan, it's time to determine how your financial standing fits into the equation. According to Experian, a lender evaluates your credit history, debt-to-income ratio, payment history, credit utilization ratio, and other elements indicating your financial status before deciding whether or not to offer you a loan. Appearing able to handle your credit and income responsibly increases the chance of a lender wanting to work with you. However, appearing to have a poor grasp on your finances causes you to seem untrustworthy, as a lender wants to make sure their borrowers will make their monthly mortgage payments in a timely manner. Figuring out where you stand long before you plan to submit loan applications can make the lending process quicker and easier to navigate.
After analyzing your credit report and spending habits, the Consumer Financial Protection Bureau recommends mapping out your future expenses while taking your future mortgage into consideration. Doing so helps you determine the amount of money you can put toward buying a house. This also keeps you from being turned away by lenders for asking for a loan too large for your income.
Learn the different kinds of mortgages
No two mortgage loans are exactly the same, as each is geared toward homebuyers with specific financial needs and interests. The most common type of mortgage loan is the conventional loan, says Rocket Mortgage. Conventional loans can be an extremely beneficial option for borrowers, but many buyers are excluded from using them due to their strict qualifications. Borrowers who receive a conventional loan can get away with paying a lower down payment than borrowers with other types of loans. A borrower can put as little as 3% down on a house when using a conventional loan. However, they will still be expected to invest in private mortgage insurance unless they make a down payment of at least 20%.
For those who can't afford conventional loans from private lenders, there are also government-backed options for borrowers with smaller incomes and weaker credit scores. USDA and FHA loans are two examples of these. The former are provided by the U.S. Department of Agriculture and benefit homebuyers in small towns and rural areas. This type of loan is great for borrowers lacking the savings to make a sizable down payment, states the Consumer Financial Protection Bureau. In contrast, FHA loans are offered by the Federal Housing Administration and allow borrowers to make a smaller down payment while also having a weaker credit score. A VA loan is another popular government-backed loan option reserved for veterans, service members, and their spouses.
Understand the impact of mortgage rates
The interest rate is one of the most important components of a mortgage loan since it determines how much extra you'll pay each month on top of your principal cost. Interest rates greatly impact housing market activity, according to Bankrate, as buyers tend to exit the real estate market when rates increase too much. Potential homebuyers should take mortgage rate fluctuations into consideration before deciding to apply for a loan approval in order to ensure that they will be able to afford monthly mortgage payments in the long term. Borrowers can track mortgage rates online using a variety of websites, operated by news organizations, banks, and other private lenders. The Federal Home Loan Mortgage Corporation, better known as Freddie Mac, is a highly reputable government source commonly cited by economists when discussing mortgage rates and the housing market at large.
Borrowers should also understand how different loans react to the ever-changing interest rates before selecting a mortgage. There are fixed-rate mortgages and adjustable-rate mortgages, two options that are accessible through private lenders. A fixed-rate loan is quite self-explanatory. With it, the interest rate you agree upon with your lender will remain the same throughout the duration of your loan, says Rocket Mortgage. On the other hand, adjustable-rate mortgage loans, or ARM loans, tend to fluctuate as mortgage rates ebb and flow. This means your monthly payments will likely increase and decrease over the course of your loan's life.
Consult multiple professionals
Potential homebuyers don't have to wait until they have enough money saved up to speak with a mortgage lender about their finances. They also aren't restricted to speaking to just one lender. According to Investopedia, the average borrower sends applications to two or three different lenders when looking to get approved for a loan. Some borrowers send up to six applications across multiple lenders to increase their chances of getting approved and to make sure they are landing the best possible deal. Many lenders offer consulting services alongside their practices, but potential borrowers craving a less biased conversation with a professional can hire a loan consultant instead.
According to Home Lending Pal, a mortgage loan consultant is a licensed expert who helps clients navigate their mortgage lending experiences. Not only can borrowers speak with consultants about their mortgage concerns, but they can prompt their consultants to speak to lenders on their behalf. While hiring a consultant would incur an extra fee for the borrower, using one's services could make the process of acquiring a loan much easier. A real estate agent is another knowledgeable source when it comes to the mortgage lending process. If you've been working with an agent to find a new house, consider asking for tips on choosing the right mortgage loan, or even ask them to recommend a lender.