The most difficult part of the home-buying process for many first-time buyers is choosing the right mortgage. Mortgage terms are filled with variables that can alter the overall cost of the loan. Learn how to compare the terms of various mortgage options to make the right decision when it comes time to purchase your first home.
All banks and lending institutions are governed by the same federal interest rate so going from one to the next to compare the numbers is not necessary. What is necessary when it comes to interest rates is to check whether the rates you have been quoted are fixed for the life of the loan or adjustable with the fluctuations of the market. The interest rate for adjustable loans can increase or decrease as the federal rate does, resulting in higher payments and more interest than at the inception of the loan. This is particularly true with adjustable-rate mortgages that offer extremely low rates. With nowhere to go but up, the odds are your loan's interest rate will rise, taking your payments along with it. Fixed-rate mortgages may have higher interest rates initially, but over the long term, they are often the safer bet.
One point is equal to 1 percent of the total amount of the loan. Points are paid to the bank at the inception of the loan as a guarantee of your willingness to pay. Additional points can be requested by the borrower as a way to pay down the mortgage balance before interest payments begin. If enough points are paid to reduce the loan amount significantly, the mortgage rate may also be lowered. The amount of points on your loan should be clearly stated by your lender so there are no surprises at closing.
There are a variety of fees associated with a new mortgage including the loan application, loan creation, closing costs and settlement fees. These fees all have a bearing on the amount you will be responsible to pay at the time of purchase, so they are important to review and compare between lenders. Any money saved in fees can go directly toward mortgage payments or your down payment. Some lenders advertise mortgages with no fees. Read the fine print carefully and make sure your fees have not been rolled up into the balance of the loan where you will be responsible for paying both the fee amounts and the interest they generate.
Typical mortgages are available for either 15- or 30-year periods. Each has its benefits and drawbacks, and one or the other may not be right for every lender. Shorter 15-year loans tend to have lower interest rates but higher payments because they condense the payback period into half the time of a 30-year loan. These 15-year loans will certainly save you money, but the higher payments they bring may be out of range for some buyers. Although 30-year loans demand twice as many payments and double the time of 15-year loans, the monthly payment you have to deal with can be significantly lower. As an investment, the shorter the loan the better, as long as the payments are doable for you.
The APR or Annual Percentage Rate of your mortgage is not the same as its interest rate. The APR is actually the combination of all fees associated with the loan plus the interest rate itself. The result is an accurate picture of your total annual rate including broker fees, lender fees, closing costs and points. This is the true number you are paying for the life of the loan and the one which should be compared between lenders.
At one time, 20 percent was the norm for a mortgage down payment. Today as little as 5 percent may suffice depending on the lender, your credit background and income. The more you can afford to put down the better, since you will not have to pay any of that money to the bank with interest. If you are short on cash or would prefer to hold your cash in hand, check which lenders have the lowest down payment requirements to find a loan you can afford so you can get into the new house now.
- Stockbyte/Stockbyte/Getty Images