How to Choose a Home Loan
When you buy a home, you are committing to that property for several years. As it will be one of the largest financial investments that you will ever make, it is important that you choose a home and a loan that fits your needs and budget. Let's look at some tactics that you can use to find a mortgage that accomplishes both of those things.
Determining If a Mortgage Meets Your Needs as a Homeowner
To choose the right mortgage, you have to know why you are buying a home and what you plan to use it for. If you are going to live in the home for less than five years, it may be a good idea to choose a loan that has an adjustable mortgage. Rates on adjustable mortgage loans are generally lower than those on fixed-rate mortgages, and loan rates generally don't change for at least the first five years of your loan.
If you are worried more about keeping money in the bank as opposed to building equity, you may want to look at an USDA or FHA loan as down payments are as low as 3.5 percent. Interest rates on government loans are comparable to traditional mortgage rates, and you may be able to lock in that rate for the term of the mortgage if you desire.
Determining If a Mortgage Fits Into Your Budget
Traditional mortgages require that you put 20 percent of the home's purchase price down at closing. If you bought a $200,000 house, you would put $40,000 down. You may also be required to pay points to your lender as well as loan fees and attorney fees that could total $5,000 or more depending on where you buy and the amount of the home itself.
Government loans tend to work best for those who don't want to put money down or want the option for someone else to pay their closing costs. FHA loans generally allow other parties to pay closing costs or contribute to the down payment as long as they document where the money came from.
Those who gift the money must also certify that the money is a gift that doesn't have to be repaid. Regardless of what loan you choose, your mortgage payment shouldn't be more than 28 percent of your pretax income. If it is much higher than that, you may want to choose a less expensive house or put more down to lower your payment.
What Else Should You Consider When Looking for a Loan?
If you are looking to keep interest payments to a minimum, you should consider a shorter loan term. In addition to paying less interest over the life of the loan, it helps you to build equity in your home faster. This may make it easier to sell your current home if and when your needs change. Never take out a loan that has a prepayment penalty. This makes it impossible to refinance your mortgage or pay off the debt early.
The average homeowner will take 30 years to pay off his or her mortgage. Therefore, it is important that you choose a loan that you can afford both today and well into the future. To ensure that you get the right mortgage, it may be a good idea to talk with several lenders to see what they offer and find the terms that best fit your needs.