How To Find The Right Mortgage
Shopping for home loans, unfortunately, isn't nearly as fun as looking for a deal on that new smartphone or pair of shoes you really want. But, as with the bargain hunting you do for everyday items, you've got to put some time and effort into decoding the world of home mortgages to find the right loan.
Before you decide on your home mortgage, here's what to do.
Determine What You Can Afford
Given how large a home loan usually is, you're probably already wondering if you can afford it. You don't want to end up with a loan you're struggling to make the payment on.
Most financial advisers recommend following the "28/36" rule for a home loan. You should not spend over 28 percent of your before-tax income on housing, and your total monthly debt should not go over 36 percent of your income.
So, if you make $6,000 each month before taxes, multiple that by 28 percent. Your monthly housing payment should be at or below the result of $1,680.
Set Your Upfront Costs Saving Goal
Your lender will look at your money in the bank to determine if you can cover the down payment and closing costs on your house.
Your down payment will depend on your home purchase amount and mortgage type. Traditional loans, for example, usually come with a 20-percent down payment requirement. However, there are first-time buyer programs which may allow you to offer a lower down payment. Closing costs usually range from 3 to 5 percent of your home loan amount.
Consider the Loan Length
A 30-year mortgage is typical, but there are shorter loan terms available, such as 15 years. If your budget allows for it, going for a shorter loan term will save usually save you money in two ways: a lower interest rate and a reduction in total interest over the loan term.
Understand How Home Loan Interest Rates Work
Interest rates move a lot, along with the bond market they're tied to. What you need to know is you can lock your rate in for the entire loan term or let it adjust with the market annually.
A fixed-rate mortgage has an interest rate that never changes. An adjustable-rate mortgage's interest rate resets once a year once you pass the initial rate-lock term, which can be three, five, seven or ten years after you took out the loan.
What rate type will work the best for you depends on what you are comfortable and how long you plan to own the home. Since adjustable rates go up and down, they may work for you if you're not planning to own the home beyond the rate-lock period. A fixed rate will never change and is often best if you plan to own the home for a long time and want a steady payment amount.