As you visit financial institutions about a home loan, it can help to have questions or topics ready to discuss. Such questions will help you learn about the best options for you, and will allow you to compare offers from different lenders side by side.
Which type of mortgage will be right for you? Typically, there are two major types of mortgages: fixed-rate mortgages and adjustable rate mortgages. The specific mortgage you choose will depend on your circumstances. If you plan on staying in your home for the long term, a fixed-rate mortgage may be the better option for you. You don’t risk a rise in interest rates throughout the fifteen or thirty years that you hold the mortgage and your payments will be predictable and straightforward.
With an adjustable rate mortgage (ARM), you can expect the interest rate to change throughout the life of the mortgage. One example of an ARM is a mortgage that starts with a low interest rate, which changes after the initial period of time passes. After that period, the ARM interest rate will be based on a standard financial index, up to a certain set limit, and your overall mortgage payment will change accordingly.
If you look into this option, pay close attention to the maximum interest rate you may pay, as well as the calendar dates where the interest rate will change. If there is a big change in the interest rate, your mortgage payments may suddenly rise, and you need to be sure that your budget can handle the increased payment. An ARM’s low initial interest rate may give you an advantage if you’re not planning on staying in your home for the long term, as long as you carefully consider your budget. Different mortgage types suit different purposes, so be sure to talk to lenders about the best option for you.
Compare interest rates with different lenders. Different financial institutions have different ways of calculating the interest rate they’re going to offer you. Some lenders may weigh certain factors more heavily than others, so there can be some variation in what you’re offered. A fraction of a percentage point can make an enormous difference in the amount you pay over a 30-year mortgage.
Will you pay points? Points allow you to reduce your interest rate. You pay a certain amount at closing (one point is calculated as one percent of your mortgage) in exchange for a reduction in your interest rate.
If you are offered points with you interest rate, talk to your loan officer about breaking down those numbers into the specific amounts you would pay at closing and on your mortgage payments. You can also find calculators online that will help you do this. Dollar amounts will help you compare offers from different financial institutions.
Compare closing costs. Different lenders may offer different closing costs, so it can help you to see estimated closing costs from various financial institutions before you make your final decision.
Closing costs include loan origination fees, application fees, appraisal and inspection fees, as well as other insurance and settlement costs. You can talk to lenders to develop a good understanding of each of these costs, and compare them as a factor in your decision.
Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 19 years experience in retail banking and with financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at email@example.com.