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Shopping is said to give us a boost of endorphins, making us feel energetic and euphoric. While that might work for the latest electronics or a new pair of shoes that are to die for, it doesn’t quite hit the same formortgages.
Shopping for a mortgage can be a task, requiring you to sift through a ton of competitors to find the best deal.
We might not be able to make shopping or applying for a mortgage fun for you but, we can make it simple. We’ll walk you through 5 simple steps to choosing the best mortgage for your needs so you can get it done and get back to shopping for all the things you love.
How to Choose the Best Mortgage
#1. Calculate How Much You Can Afford
Most homes these days are in the six-figure field which classifies it as a large investment. Lenders are careful when they approve loans, making sure that borrowers have a few criteria beforehand. Lenders will review:
- Debt-to-income ratio
- Loan-to-Value ratio
- Credit score
- Job stability
While you may be approved with a decent credit score, you still need to take some time to think for yourself and calculate what you can afford.
Due to the large amount you’re asking to finance, your monthly mortgage payments will likely be large too, which can put a damper on other plans you might have.
Make sure the payments you’re looking at fit into your current budget and leave a little wiggle room in case of emergencies.
>> More: How to Buy a House
#2. Understand Which Mortgage You Need
You might not know this but, not all mortgages are the same. There are tons of mortgage types, some with a long list of requirements and others straight to the point.
Before shopping for a mortgage, you want to be sure that you know what to look for, narrowing down the best mortgages for you.
A few of the most common mortgage types include:
- VA Loans: For military service members, veterans, and their spouses, a VA home loan allows those who qualify 100% of the loan amount without the need for a down payment. There are lots of other benefits that come along with it so take advantage of it if you qualify. See the best VA mortgage lenders.
- FHA Loans: The Federal Housing Administration (FHA) is a great choice for low-income borrowers and/or first-time home buyers. FHA Loans don’t have the same requirements for credit scores and incomes and require a low-down payment.
- Conventional Loans: Conventional loans that are not backed by the federal government are known as conventional loans. These loans are best for those that have spotless credit and stable employment with the ability to put at least 3% down.
- Fixed-Rate: Interest rates can affect the amount you pay each month over time. With a fixed-rate loan, the rate will not change and stay locked in for the duration of the loan (usually from 10 to 30 years).
- Adjustable-Rate: Adjustable-rate loans change but, only after 10 years. After the 10-year mark, the rate adjusts to the market value and can either increase or decrease.
- USDA Loans: The US Department of Agriculture (USDA) is a great choice for homebuyers that live in rural areas. It’s a government-subsidized loan and is available for all homebuyers that meet a set of requirements.
- Jumbo Loans: Jumbo loans tend to be riskier and exceed loan amounts you can find with any other option. To qualify, borrowers typically need large cash reserves and make a considerably large down payment of at least 10%.
#3. Compare Lenders
One great thing about shopping for mortgage lenders is that you don’t have to go with the first one you visit. Instead, you can shop around, comparing those that you feel are the most competitive and have the best deals.
A good place to start is by asking your friends and family, all of which might have a suggestion of lenders they’ve used.
When comparing lenders that you think will give you the best deal, keep an eye out for:
- Their interest rate
- Their terms (min and max years to finance)
- Their required down payment
- Their requirements for accepting a loan application
With all of these figures from multiple lenders, you can compare and contrast, finding the one that best suits your financial needs.
Plus, if you find a lender with conditions you love but can score a better rate with another, you can use that to your advantage, seeing if they can match your best price.
>> More: Compare the Best Online Mortgage Lenders
#4. Know the Closing Costs and Fees
There is a lot more tied into a home loan than just the price of the home itself. Your lender will also collect interest on the amount that they lend you and tie in closing costs.
The good thing is, you can get an idea of what it will cost you in the end, as your lender will provide you with a detailed breakdown of all of the costs. But remember, some closing costs are negotiable.
Also, consider your goals with the purchase of a home. Is owning this home temporary, or will likely refinance and pay over the long term.
#5. Take Your Time and Research All Options
Once you gather all your options, don’t rush when it comes to making your decision. Take some time, weigh your options, and choose the ones that fit your financial needs best.
How Do I Know What Mortgage to Choose?
The best thing you can do is read over the qualifications of loans. If you can qualify for loans that don’t require a down payment and that come with low-interest rates, those are the best out there.
The thing is, not everyone qualifies for those loans and most of them have very strict guidelines for qualification.
How Long Should Your Loan Term Be?
That depends on your financial means. While some loans offer terms from 10 to 30 years, the interest could build up and have you paying much more overall. See how much you can afford, then find the best term to pay off as fast as you can.
Bottom Line: How to Choose the Best Mortgage
Finding a mortgage that works for you is simple, it just takes time. Be patient and shop around and you’ll find a perfect match to make your homeowning dreams a reality.