The type of mortgage you choose could save you thousands of dollars over the life of your mortgage. Take your time and make sure you have all the facts before making a final decision.
Download Your Home Loan Toolkit for a free step-by-step guide with worksheets that help you work through each step in the process listed below and get the best mortgage for your situation.
- Define what affordable means to you
A mortgage lending rule of thumb is that your total monthly home payment should be at or below 28% of your total monthly income before taxes. Lenders may approve you for more or for less depending on your overall financial picture, but how much are you comfortable paying each month for your total home loan? The total home loan cost includes the mortgage principal plus interest, mortgage insurance, property taxes, homeowners insurance, and any HOA or other neighborhood fees. See pages 3-5 in Your Home Loan Toolkit (YHLT) for more information and worksheets.
- Understand your credit score
Your credit, your credit scores, and how wisely you shop for a loan that best fits your needs have a significant impact on your mortgage interest rate and the fees you pay. To improve your credit and your chances of getting a better mortgage, get current on your payments and stay current. About 35% of your credit scores are based on whether or not you pay your bills on time. About 30% of your credit scores are based on how much debt you owe. That’s why you may want to consider paying down some of your debts. See page 6 in YHLT for more information.
- Pick the mortgage type that works best for you
There are many different types of mortgages with the main differences being loan term, interest rate type, and loan type. Loan term indicates the length of the loan such as 30 years, 15 years or other. Interest rate type generally refers to either fixed-rate or adjustable-rate mortgages. Loan type includes categories such as conventional, FHA, VA, and USDA. Government programs often include low down payment or no down payment options. See page 7 in YHLT for more information.
- Understanding the difference between points and interest rate
Points are a percentage of a loan amount. For example, when a loan officer talks about one point on a $100,000 loan, the loan officer is talking about one percent of the loan, which equals $1,000. Lenders offer different interest rates on loans with different points. There are three main choices you can make about points. You can decide you don’t want to pay or receive points at all. This is called a zero point loan. You can pay points at closing to receive a lower interest rate. Or you can choose to have points paid to you (also called lender credits) and use them to cover some of your closing costs. See page 9 in YHLT for more information.
- Choose your mortgage and avoid pitfalls
Once you’ve done your homework and figured out how much total loan cost you can afford each month, reviewed your credit score and decided on the type of loan you want, it’s time to shop for a mortgage. This important step could save you thousands of dollars over the life of your mortgage. Take your time and make sure you have all the facts before signing any documents.
- Make a list of several lenders you will start with
- Get the facts from the lenders on your list
- Compare Total Loan Costs
See pages 10-15 in YHLT for worksheets and more information on choosing the best mortgage for you as well as avoiding common pitfalls and handling any problems that should arise.
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