Borrowing the money to finance your first home is a huge undertaking. As a first-time buyer looking for a mortgage, you might feel overwhelmed because there are so many options. Read on for some tips for navigating the mortgage selection process.
One of the first decisions will be choosing your lender. Whether you work with a bank, a credit union, a mortgage company, or a mortgage broker, you will have many types of loans to choose from. A mortgage broker can help you shop around for the best terms, but may also collect a fee for the service.
As you examine all options, bear in mind that repaying a mortgage includes paying principal and interest over a period of years, usually between 15 and 30 years. Your monthly payments reduce the principal of the loan and the interest owed. With time, more of your payment goes to the loan principal.
Another consideration is whether you will choose a fixed or adjustable interest rate for the loan. For example, you could take out a note for fixed payments of 30 years. If your interest rate is adjustable, you might pay 8% interest for the first 3 years followed by a higher or lower rate when the prime rate fluctuates up or down.
When you are asked to select the interest rate you will be happy with, be sure that you get the best rate. Selecting a lender that guarantees the best interest rate comes in handy.
Ask questions
There is much more to understand before signing a mortgage. As you shop around, focus on basic questions before moving onto the finer details of the loan.
These questions will help you to get a feel for which lender you prefer. Who can I trust with this important decision? Will the person take the time to answer all of my questions? Will the person find the right product to meet my needs?
When you have a better idea what loan you prefer, you might find that one lender or broker can offer choices between multiple programs. That is a win-win situation.
Here are a few sample questions to ask your lender about loan products:
1. What is my interest rate?
Is it fixed or adjustable? You need to know if your payment will stay the same over the life of the loan or if the interest rate will adjust with the market.
Recommended resource: ARM vs. fixed rate mortgage calculator
2. What will my monthly payment be?
The bottom line for many people is the total mortgage payment. Ask if the loan payment includes escrow for the property taxes and home insurance or if you will be required to make direct payments for taxes and insurance to separate entities.
3. How many years will I have to repay the loan?
From 15 to 30 years, select the lifetime of the loan that is right for your financial future. Beware of programs that are too short or too long, like 10 years or 40 years.
4. What is my down payment?
This is how much cash you will put down on the property loan.
5. What are my closing costs?
These are fees that you may have to pay in addition to your down payment. Another option is to finance closing costs over the lifetime of the loan.
6. What are the administrative costs for the mortgage?
These costs might include fees for the mortgage broker, the home appraisal, the title work, etc. Worry about quibbling over the specific amounts after selecting a loan product.
Keep in mind that there are dozens of other questions to ask before the closing of your home loan. Mortgage terminology is one subject to understand.
You should also speak with a realtor or property attorney about the details of the property you are buying. Getting the right deal for your first home includes making sure all paperwork transferring the home ownership to you matches the right loan product.
Getting both of these processes to flow into a final product you can be satisfied with should not be rushed. Remember, ask many questions and take good notes. Buying a house is probably the biggest investment you'll ever make.
See also: Compare mortgage rates