One of the most important financial decisions a person can make is the purchase of a home.
It’s often the largest purchase you’ll make in your lifetime. And, unless your financial situation is extraordinary, you will need mortgage financing, which will also probably be the largest debt you will ever incur. That’s to say, one of the most daunting financial processes you’ll have to navigate.
Buying a home? 7 questions you should answer before applying for a mortgage
Fortunately, you don’t have to go through this experience alone, and here’s a list of the most important things to take your mortgage search from a nightmare to a dream come true.
What type of mortgage is best for you?
Although there are many other types of mortgages, the most typical are fixed-rate and adjustable-rate mortgages (ARMs). A fixed-rate mortgage means that the cost of the loan will always be the same. The interest rate will not change, which means that the monthly payment will be the same for the entire term of the loan, which is usually 15 or 30 years.
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Fixed-rate mortgages offer stability and predictability, making them a popular choice for many homebuyers and especially attractive for those who want to avoid the risk of their mortgage payments increasing in the future. This is something to think about at the moment, as interest rates are very high.
On the other hand, variable rate mortgages have an interest rate that can change over time. This means that the monthly mortgage payment can go up or down depending on market conditions, or the contract that is made (the closest comparison is interest cards that offer zero or very low interest for the first year and then jump to over 20%).
Adjustable-rate mortgages typically start with a lower interest rate than fixed-rate mortgages, which makes them attractive to homebuyers who want to keep their down payments low. However, ARM loans can be risky because you are betting that interest rates will at least stay at the same level (or actually go down), which may not be the case over the life of the loan.
Since interest rates are currently high (for the historical average in the U.S.), it is best to have a clear idea of the risk you are willing to take and then consult with experts.
2. How to choose the best mortgage lender
The first thing to do to choose the right mortgage lender is to go to your bank or credit union. Many financial institutions offer mortgages and, if you are already a customer, they may be more willing to make you a better offer.
But don’t stop there. Be sure to compare and review the interest rates and terms of home purchase loans from different mortgage lenders. For this, in-person or online mortgage brokers are a fantastic resource. Your real estate agent may work with one of them.
When comparing mortgage lenders, consider the interest rate, fees and terms of the loan. The most important consideration is the interest rate, since it determines how much you will pay for your mortgage each month.
Ask about origination fees, application fees or other expenses, as they can add up quickly. Loan terms, such as the term and payment schedule, can also influence what you pay each month.
3. Which is the best broker and lender.
Beyond all the financial information you learn, there is no more important task in this whole process than finding the best broker and lender.
A good broker will help you find the best lender. He or she will also be an essential ally in helping you organize your finances and paperwork. Pay special attention to the licenses and credentials of the agents you are considering. It is essential that it is someone you trust and who you feel is in your corner.
If you don’t know how to get started, ask around. Surely someone knows an agent who has a good reputation. One element you can’t overlook is your agent’s knowledge of special low interest rate or very small down payment loans, which are usually financed by government agencies or banks.
4. What if you are an immigrant?
One piece of advice for newcomers is to raise your credit score as much as you can before submitting a mortgage application.
This can be accomplished by keeping credit card balances low, making timely payments and refraining from applying for additional credit. A higher credit score can also translate into a lower interest rate and simplify applying for a mortgage.
But don’t despair, there are options for those whose credit is less than ideal.
One alternative is to work with a mortgage broker who specializes in finding loans for people whose credit is less than perfect. These brokers have access to a network of lenders who are aware of the particular difficulties that immigrants and people with bad credit have when trying to buy a property, and can offer solutions designed specifically to meet their needs.
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