Identifying the best mortgage fit for yourself or your family is about more than just finding the lowest rate — though a low rate is certainly a big perk. When making one of life’s biggest purchases, you’ll also want to consider such things as the best type of loan for your specific needs, the financial strength of your mortgage lender,the lender’s requirements for applicants regarding credit score,down payment, etc., and — perhaps most important — how knowledgeable, professional and helpful the lender will be when you need guidance through the often-complicated home-buying process.
While this is certainly not an exhaustive list, be sure to consider these 7 questions before you sign on the dotted line with a mortgage lender to ensure that you’re getting the best fit:
1. How much home can I afford?
There’s a difference between how large a loan you qualify for and how much you actually feel comfortable borrowing, and a bit of soul-searching will be required to make the decision that’s right for you. One commonly followed rule of thumb (and one that’s often used by mortgage lenders to calculate borrowing capacity) is called the 28/36 rule — which states that a household should spend no more than 28% of its gross monthly income on total housing expenses, and no more than 36% of its gross monthly income on total debt services, including housing loans, car loans, credit card debts, etc. That said you may not be comfortable taking out a loan that puts your household at the 28% level for housing expenses or at the 36% debt-load level. Choose a loan with a monthly payment that leaves you with a comfortable amount of income for savings, regular expenses and discretionary spending.
2. Do I fully understand all of my mortgage-rate and term options?
A number of mortgage products are available, and the best fit for you will depend upon your goals and resources. Would you prefer a conventional fixed-rate loan, for which the interest rate remains constant over the full term, or an adjustable-rate mortgage (ARM), which might offer a lower rate that could change over time? Do you qualify for VA or USDA loans, which might offer more competitive rates? Would you prefer a loan term of 10 years, 15 years, 20 years, 30 years (the most common) or 40 years? A knowledgeable mortgage lender can walk you through all of your options to help you determine which mortgage product is the best fit for you.
3. What’s the difference between interest rate and APR?
Easily confused as interchangeable terms, interest rate and APR are actually not one and the same. The interest rate, which is expressed as a percentage rate, refers to the cost a homebuyer pays each year to borrow the principal loan amount. The APR, or annual percentage rate, is a broader term that covers the interest rate as well as any mortgage-broker fees, discount points (a form of prepaid interest meant to reduce the cost of the loan for the homebuyer) and other closing costs that figure into the total cost a homebuyer pays to borrow money. While also expressed as a percentage rate, the APR is generally higher than the interest rate, since it includes the additional charges.
4. How do I get qualified for a mortgage?
A number of factors are considered when a lender decides whether to issue a loan approval — among them are income, employment history, credit score, financial history (including any bankruptcies, late payments or collections) and current debt load (including credit cards, car loans, student loans and other loans). As a prospective homebuyer, you can do a few things before applying for a loan to increase your likelihood of approval, among them paying down your credit card debt and taking steps to improve your credit score.
5. What’s the difference between preapproval and prequalification?
When you begin your loan-shopping process, you’ll likely come across offers for prequalification and preapproval from various lenders. With prequalification, you are not required to submit your Social Security number, allowing you to learn about loan details without having your credit score accessed (and preventing a score-affecting hard inquiry on your credit report). But with prequalification, there is no guarantee that you’ll actually be given the loan should you want to move forward — rather, it gives you a good idea of how big a loan you might expect to be approved for. Preapproval, on the other hand, carries more weight, as it involves a deeper dive into your financial situation and history. With preapproval, you’ll be asked to provide your Social Security number and a number of financial documents, and your credit score will be accessed. Once preapproved, you’ll receive a conditional commitment from the lender for an exact loan amount, allowing you to shop for a home at or below that cost. Preapproval will also give you a better idea of what your specific interest rate will be.
6. Which mortgage product should I choose?
The answer to this question largely depends on your situation and your goals. Among the numerous mortgage products offered are residential mortgage loans, construction loans, residential lot loans, VA loans, FHA loans and USDA rural housing loans. This is another case where having a knowledgeable mortgage lender is especially helpful, as he or she can explain all of your options and help you determine which is the best fit for you.
7. Who can answer any questions I may have about my mortgage?
How to get answers to your mortgage questions will vary depending on the mortgage lender you choose. Some mortgage lenders may not have offices in your area, leaving you with web forms, email addresses and toll-free phone numbers as your primary avenues to getting your questions answered. Other lenders will have offices in your hometown, allowing you to have a personal relationship with professional staff members who can answer your questions directly.
Ready to start the search for your new home and home mortgage? The Mortgage Team at Standard Affluent Private Bank is eager to help and answer all of your questions. Visit haveanicebank.com or call +1 (919) 689 1999 to learn more.
