Finding the right mortgage loan is almost as essential as finding the right home. There is a multitude of different lenders and types of loan to consider, and advance research into the different types of mortgages available will help to ensure that the right product is chosen. Understanding how mortgages work is not everyone’s forte, but it pays to cover the basics rather than be tied into an unsuitable loan.
Term, type and interest rate are all vital considerations when shopping for a mortgage loan. Fixed rates versus adjustable rates can make a crucial difference to monthly payments, yet the Federal Reserve have conducted research which shows that the majority of homeowners do not understand how adjustable rate loans work. Without an understanding that monthly payments will be affected by fluctuations in mortgage rates, it is impossible to make an informed decision.
When comparing lenders it is essential to check the fees which are applied to mortgage loans, as they can vary considerably. A lower interest rate can be cancelled out if fees are high, particularly if the borrower then needs to add these to the mortgage loan, or take out a second mortgage to cover them. It is far wiser to ascertain fees in advance and treat them as a separate transaction, paying for them independently of the mortgage loan. Never lose sight of the opportunity to negotiate fees.
Many mortgage loans have penalty fees attached which preclude borrowers from refinancing without paying a heavy price. It is worth calculating if attached penalties are a reasonable return for a lower interest rate or reduced fees. It is important to consider the length of the penalties and what the costs would be if they were incurred.
The mortgage term is far too often given little consideration as borrowers automatically plump for traditional twenty-five-year loans. However, loans are now available which span thirty and even forty years, and borrowers should be aware that these represent huge interest payments which can add up to more than the original loan.
Make use of free online mortgage calculators to assess the difference in interest which would be paid on a shorter loan, in return for slightly higher monthly payments. The shorter the term the more quickly equity is built in the home, whilst at the same time offering massive savings in unnecessary interest payments. If a shorter-term loan does not appear to be immediately affordable, then ensure that a mortgage is chosen which does not apply penalties for overpayments.
There are three important factors which the borrower can influence when it comes to obtaining a favorable home mortgage loan. These are credit score, which will play a good part in determining the interest rate offered; the size of the down payment, which should be more than 20% to obtain better rates; and whether PPI is necessary, which is again primarily determined by the size of the down payment, and most usually required with deposits of less than 20%.
Preparing finances in advance of applying for a mortgage loan, researching available loans, and comparison shopping for the best deals, are all worth doing. A mortgage is a long-term financial commitment, and it is very important to ensure that the new home is financed by a mortgage which is tailored to individual needs.
Source: Federal Reserve.