How to Find the Perfect Home Loan
Taking out a home loan is one of the most significant financial commitments a person can make in their lifetime as it’s very unlikely you’ll ever make a bigger purchase than a house. For a lot of people this can be stressful because it seems so monumental and intimidating. It doesn’t have to be, though. If you approach it like you approach any other purchase or financial transaction, you can ensure that you’re going to get exactly what you need in an easy-to-understand and manageable way.
Shopping for a home loan may not be quite the same as shopping for a new car, a new phone, or what you want to have for dinner tonight, but you can use many of the same principles to ensure you get exactly what you’re looking for. You want to get the best deal, the best service, and the most peace of mind out of the entire process.
Let’s take a look at some of the most important things you’ll need to consider when you’re looking to find the perfect home loan, and how you can make it as easy and pain-free as possible.
As part of the process of getting ready to apply for a home loan there are things you can do in advance.
- Pre-Qualification: You can go to your bank and answer some questions about your work and finances. Your bank will be able to provide you with what is called a Mortgage Pre-Qualification Letter. This will let any real estate agent or home seller know how much of a mortgage you will be able to afford. You don’t have to do this to find a home loan by any means, but it’s one step that makes things easier in acquiring a home down the road.
- Use a Calculator: Mortgage calculators are valuable tools when you’re looking for a home loan. You can use one of these, which can be found all over the Internet, to determine exactly how much of a mortgage you’ll be able to handle. This makes it easier to figure out what to look for by narrowing your search.
- Check Your Credit: There are a number of free services that will let you know what your credit score is. Since lenders are going to want to look this up before offering you a loan, it’s good to know where you stand so you don’t get surprised. When you know your credit score, you’ll have a better idea of what kind of home loan you can qualify for and what kind of house you can afford.
- Save: You’ll have a better chance of getting the home loan you’re looking for if you can just show the bank that you already have a down payment saved and ready to go. Showing that you have savings and are the kind of person who can maintain a good bank balance goes a long way to proving that you’re a good risk for a loan.
This is one of the most important lessons anyone can learn when it comes to finding the perfect home loan. Your bank will probably have all kinds of offers available to you for a home loan. If you search online, you’ll find dozens if not hundreds of potential lenders. Don’t settle for the first one you find. When you’re shopping for a house you don’t pick the first house that you see on the market, right? You should shop for a home loan the same way.
A good rule of thumb is to look in at least three different places. If you are the kind of person who is really adamant about finding the best bargains out there, check out four, five, or even more potential lenders. But you’re going to want to compare all the services and rates that everyone offers to find out will be the best for you. Since this is such a big, serious part of your life you want to make sure you’re doing your due diligence.
There are many lenders out there who will talk a good game and offer great deals, but it never hurts to be fully informed about what the competition has either.
Choose the Right Type
If you’ve never shopped for a mortgage loan before you may be surprised to find out that it’s not as simple as just asking for a loan. There are several different types of loans that you may qualify for.
- FHA Loans: FHA stands for the Federal Housing Administration. If you qualify for this type of loan, you’ll need a down payment of as little as 3.5%. These are best used for people who don’t have a ton of cash in savings and may not have the best credit. The trade-off for the advantage of the low down payment is that you also need to pay private mortgage insurance every month.
- VA Loans: These loans are guaranteed by the Department of Veterans Affairs. You may not even need a down payment for one of these loans however you have to be a qualified veteran to get one.
- Jumbo Mortgages: As the name implies, this is what you get if you’re looking for a very big loan for an expensive property. So, if the loan you’re looking for is more than what a conventional loan allows for, you can go for this if you meet the rules and credit requirements for it. The odds are most first-time home buyers are not going to be heading down this road.
- USDA Loans: This kind of loan is available for people who are more interested in living in rural and/or suburban areas as opposed to in a city. You’ll need to meet the appropriate qualifications, as will the property you’re looking to buy.
- Conventional Loans: To get this kind of mortgage you’ll need to put 20% down but you don’t need to pay the kind of insurance required with an FHA loan. This is what most home buyers go for, so long as they have money saved ahead of time to handle things like the down payment and any closing costs.
No matter what kind of property you’re looking to buy, one of these types of loans should fit your needs. Look into each of them and discuss them with your bank to see which one will best meet your needs if you’re not sure right off the bat.
Know Your Terms
When it comes to borrowing money, you need to be sure you understand how interest rates work. Interest rates fluctuate quickly – even over the course of a day.
If you lock in a fixed mortgage rate for the life of the loan, your rate will likely be higher than if you get an adjustable rate mortgage. You’re hedging your bets here and hoping that it’s going to be reasonable over the long term as a result. Since the rate is fixed, you won’t run into a situation of higher mortgage payments in the future even if market rates rise.
If you go with an adjustable rate mortgage (ARM), your interest rate can change on a yearly basis after a set amount of time, which means that the rates could go much higher or much lower, depending on the market.
If your plan is to only live in this house for a few years because you have maybe a five-year or a 10-year plan that includes moving to another city or a bigger house, it might make sense to go with an adjustable rate mortgage instead of a fixed rate. As long as you’re planning on moving or having the whole mortgage paid off before the guaranteed rate expires, you won’t have to deal with any surprises.
The benefits and drawbacks of fixed vs adjustable rate mortgages will vary and be specific to each borrower. You’ll want to weigh the potential of each for yourself.
Pick a Time Frame
When you get a mortgage, you are typically in it for a long-term commitment. There are different options depending on your financial situation and your intentions. While a 30-year mortgage is most common, 10, 15, and 40-year terms are also available. The shorter the loan, the less interest you’ll end up paying in the long run but the bigger your monthly payments will be. What you choose all depends on your personal financial situation.
The Bottom Line
Finding the perfect home loan doesn’t have to be intimidating. Your best bet is to do your homework before you dive into anything. It’s easy to get overwhelmed if you’re taking in a bunch of information all at once. But if you do your research ahead of time, and you’re able to compare what one bank or lender offers compared to another, you’ll be able to take control and easily see what’s going to best suit your needs.
Whether you choose to go with a bank, an independent mortgage broker, or a credit union, just remember that you are in control. You don’t have to agree to anything or settle for anything until you’re ready. Get the details you need and move forward only when you feel comfortable doing so.