Choose the Right Home Loan

Unless you plan to pay cash for your home, you will need to obtain a mortgage to finance it.  With so many different loan options and countless lenders out there, shopping around for mortgages can be a confusing, stressful and frustrating process.  Here are a few steps you can take to make sure you land the perfect home loan:

 

1) Shop Around. Take time to shop around and find the best possible interest rate and loan terms. You should talk to a minimum of three different lenders before you make your final decision. Do some online research and don't be afraid to call up lenders and ask lots of questions.

 

2) Ask for Recommendations. Your friends, co-workers and family members may be able to recommend a good lender. Ask them if they are happy with their loan and their lender's customer service. Whatever you do, do not settle for the first company that offers you a loan. Find a trustworthy, reliable lender that is the best fit for you.

 

3) Weigh Your Options. Because there are numerous types of mortgage loans available to home buyers, choosing the right one can be challenging. Here are a few things to keep in mind as you consider your options:

 

  • Fixed-Rate vs. Adjustable Rate: A fixed-rate mortgage has an interest rate that is locked in throughout the life of the loan (usually 15 to 30 years.) On the other hand, an adjustable rate mortgage (or ARM) has interest rates that vary over the life of the loan. With an ARM, your interest rates can change every six to 12 months or even monthly. Typically, an ARM's interest rates are tied to an economic index, such as the national mortgage rate. When rates are high, your rate will increase. When rates are low, your rate will drop.

    • If mortgage rates are extremely low when you're buying a home, you should probably choose a fixed rate loan. That way, your rate will be locked in at this low level for the life of your loan. On the other hand, if interest rates are very high and you think they will decrease soon, you may consider an ARM. However, this is an extremely complicated decision, so you may want to discuss your options with a financial advisor.

 

  • Rate Lock-Ins: If you expect interest rates to rise in the near future, you should ask your lender for a mortgage rate lock-in when you apply for the loan. This ensures that the rate the lender offers you will stay the same for a certain period of time (usually 30 to 60 days.) That way, if you buy a home within the next month or two, you'll be guaranteed the same mortgage rates that are available today. Once you lock in your rate, ask your lender for a contract or statement including your interest rate and the amount of time the rate will stay the same.

 

  • Closing Costs: There are countless fees and closing costs associated with mortgage loans. These fees can add up quickly and easily push you over budget. Make sure your lender provides you with a Good Faith Estimate, and take time to read all the fine print.  Ask plenty of questions about any fees you don't understand or consult an attorney for further explanation.

 

  • PMI: You are required to pay Private Mortgage Insurance (PMI) if your down payment on a home is less than 20% of the total purchase price. PMI is a type of insurance that protects the lender against the risk of your default-which is what happens if you can no longer make your monthly mortgage payments. Although the cost of PMI varies depending on your mortgage company, premiums typically run about 0.5 percent of the loan amount for the first year of the loan. PMI premiums usually decrease after the first year.

 

  • VA Loans: The Department of Veterans Affairs (VA) offers a loan program that allows buyers who are veterans to receive a legitimate no down payment loan. Through this valuable loan program, veterans can get a no-down loan and still avoid paying PMI. If you think you might be eligible for a VA Loan, talk to a mortgage broker or VA Loan Specialist. You can also call the U.S. Department of Veterans Affairs directly at (800) 827-1000 or visit www.homeloans.va.gov.