A home loan can be one of the most important decisions you make because it will affect your finances for a long time. Even small changes in your interest rate, like a change of half a percent, can cost or save you thousands of dollars over the life of your loan. Follow these seven easy steps to get a home that won't break the bank:
- You should compare prices!
There are thousands of mortgage brokers in every market, and each one has access to hundreds of loan programmes. No matter what your situation is, there is a home loan that will work for you. The more mortgage brokers and finance experts you talk to, the more likely it is that you will find someone who really knows the best home loan programme for you.
- Choose the terms of your loan BEFORE you look at the interest rates.
The length of a home loan can be anywhere from 30 to 50 years, and some are for interest only, which means you only pay the interest each month and never pay off the loan. Rate is another thing to think about when talking about terms. Some loans have rates that are fixed for the whole time you have the loan. Other loans are called "adjustable rate mortgages" (ARMs), which means that your interest rate will change after a set amount of time. When thinking about the terms, you should also think about how much of an early-payment penalty you are willing to pay. This fee is charged if you refinance your mortgage or sell your home within a certain amount of time, which is usually between one and two years or longer.
- Carefully compare rates and closing costs.
Get a tri-merge credit report from a mortgage broker and a copy of the report. When you go to see a financial professional, bring the report and a copy of your tax returns with you. Be ready to give honest answers to all questions, and be ready to tell the mortgage broker the range of prices you can afford and the terms of the loan you will need. Ask for two Good Faith Estimates (GFEs), one with minimal closing costs and one with standard closing costs.
- Look at the total amount paid each month.
The GFEs will give you an estimate of the TOTAL monthly payments for a home loan. Taxes, hazard insurance, homeowner's association dues, and other costs are not included in these estimates. Since mortgage brokers have no control over these costs, some will understate them to make their GFEs look better. Because of this, you should only compare the costs of each loan line by line. The costs of line items include the principal, the interest, and mortgage insurance.
- Look at the costs of closing.
Closing costs can make a big difference in how much it costs to buy a home. Some mortgage brokers will underestimate these costs to make an estimate look more competitive. Worse, the names of closing costs and other fees are confusing, which makes it hard to compare them. In general, compare the "Items Payable in Connection With Loan" or "Items Payable in Connection With Loan" on your GFE. These are the costs that your broker may be able to change.
- Compare the rate AND the closing costs.
Does it make sense to choose the home loan with the lower interest rate but higher closing costs? Or would you pay less for a home loan with much lower closing costs but higher rates? To decide, add up how long it would take to "make up the difference." For example, if one home loan saves you $100 a month in payments but costs you $1,000 more in closing costs, it would take 10 months to "make up" for the closing costs.
- Lock in the Rate!
Even if you are given a great rate, it doesn't mean that the interest will stay the same until you are ready to buy. Lock in your rate 30-45 days before closing.
It's exciting to decide to buy a home, but it can be scary to choose a mortgage. Follow these tips to compare smartly and make a choice that will really help you financially. Then, if you have the right money, you can enjoy your new home.
