Purchasing a home is one of the largest decisions you will make in your lifetime, so it is important to understand what you are getting yourself into. Before you sign on the dotted line, you should take the time to understand your options and what the home mortgage you choose means for the long-term, not just today.
Home Mortgage Loan Terms
There are several different terms you can choose from when shopping for a mortgage. Most people automatically choose the 30-year term, but that is not your only choice. Yes, that is often the safest choice, but really looking into how much a 15 or 20-year term could change the outcome of how much you ultimately pay on your mortgage is well worth it. Ask the lender which different options you qualify to receive, as the term you can afford will be based on your debt-to-income ratio as any qualified mortgage cannot have a debt ratio higher than 43% in order to stay within the guidelines.
As you look at the different terms and the subsequent payments, you will likely see a large different in the size of the payments – do not get discouraged. What you need to look at is how much money you will save in the long run. For example, if you take a 15-year term over a 30-year term, you are saving on 15 years’ worth of interest – that can amount to a lot of money! If you can find a way to afford the higher principal costs on the 15-year term now, it is well worth giving it a try.
Look at the Costs
The costs of the loan play a large role in which loan is right for you. Just because one loan has a tremendously lower interest rate than another loan does not necessarily make it better right away. You have to determine if the costs make it worth taking that particular loan. The easiest way to do this is to compare the APR or Annual Percentage Rate of the loan, which is provided to you on the Truth-in-Lending; the higher the APR, the more the loan will cost you. If you do not want to compare the APR, you can simply compare the costs of each loan as they are detailed to you on the Good Faith Estimate. Look closely at costs, such as the origination fees, discount points, underwriting fees, and processing fees, as they are the most variable costs. The first two: origination and discount points will likely add up to the most as they are a percentage of your loan amount, so make sure to really analyze those costs on each home mortgage loan.
Look at the Options
Every loan program is different. If you are taking a Qualified Mortgage with a big name lender, chances are you have very promising terms regarding the loan. There will be no prepayment penalty, rising interest rates, negative amortization, or anything else that could harm you in the future. If, however, you are taking a private loan from a lender that will hold the loan on his own portfolio, there are loopholes he can jump through to try to give you terms that might not be as attractive to you as a Qualified Mortgage would provide. If this is the case, you want to make sure you truly understand everything that you are getting yourself into. Again, ask as many questions as you want – this is your future you are talking about so do not let a lender make you feel like you ask too many questions. Inquire about things like:
- Prepayment penalties
- Rising interest rates
- Negative amortization
If the lender is unwilling to answer your questions or he seems to go around the questions in an insincere way, consider shopping with a different lender.
There is no shame in seeking housing counseling before taking on a new mortgage. After the housing crisis, housing counseling became a normal part of many loan programs, but not every single one of them. If you do not understand the home mortgage loan terms or want to see how a particular mortgage will affect you in the future, seek one-time counseling that will help you see how you will be impacted so that you can make a good choice for your future.
Finding the right home mortgage might take some time and a lot of research, but it is worth it in the end. This is especially true if you plan to stay in the home for the life of the loan – 30 years is a long time to pay for something and several hundred thousand dollars is a lot of money to pay, so make your decision carefully, ensuring that you know what you are getting yourself into.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.