Choose the Right Mortgage
1. First, decide between a fixed rate and a variable rate.
Variable rate loans generally have a low initial rate, which will remain fixed for a period of time and then change periodically.
For example, a 5/1 ARM will have a fixed rate for the first 5 years of the loan, and then the rate will change every year thereafter. A fixed rate loan will have the same rate - and payment - throughout the life of the loan.
Variable rate loans are a good choice if you are not planning on living in the home for a long time, or if interest rates are currently high. A fixed rate loan is a good choice if you plan on living in the home a long time, or if interest rates are currently low.
2. Decide how much you want to put down
The more money you have for a down payment, the lower your monthly payment and loan balance will be. Many lenders will require that you put down a minimum of 3% as a down payment, although there are loan programs that will allow for smaller down payments, under special circumstances.
If you are able to afford 20% of the purchase price for a down payment, you will generally avoid paying private mortgage insurance (PMI). This insurance will raise your monthly payment and is generally not considered tax deductible. With a 20% down payment, you may also qualify for a lower interest rate. Be sure to ask your lender if your rate can be reduced with a larger down payment.
3. Understand the fees
The only way to get a complete picture of the mortgage fees is through the Good Faith Estimate (GFE). Be sure to ask your lender for a GFE before you commit to a loan. This document will list all the expected fees and pre-paid expenses you will need to pay at or before closing.
Comparing fees and interest rates to make the best decision is often difficult, but there is one piece of information that makes the process easier. The Annual Percentage Rate, or APR, combines all the fees and interest expenses over the life of the loan into one number. Generally, a loan with a smaller APR is the better loan, though the APR for a variable rate mortgage may not always represent the likely future cost of the loan.
4. Pick your points
Most lenders will allow you to pay extra points in order to decrease the interest rate on your loan. Generally, a point is equal to 1% of your loan balance, or $1,000 for a $100,000 loan.
When you are thinking about paying points, you need to consider how long you plan to live in the home. If paying 1 point or $1,000 reduces your monthly payment from $675 per month to $625 per month, you will need to stay in your home for 20 months to earn back that $1,000 you’ve paid up front.
5. Lock your rate
The interest rate is not yours until you’ve locked your rate. Mortgage rates change every day, sometimes more than once, and until your lender has locked the rate on your loan your interest rate will change too.
Deciding when to lock can be tricky. If you are happy with the current rate, then you should probably lock it in. That will protect you in case interest rates rise. If you want the rate to be lower, you can hold off, but your rate might go up as well as go down while you wait.
When you do lock, make sure to get a written confirmation from your lender that the rate is locked. This confirmation should contain the rate and expiration date of the lock. This will ensure there are no misunderstandings about the details of the loan at a later date.
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