Choosing the Loan that’s Right for You

Buying home is one of the biggest decisions, and more likely one of the biggest financial obligations that you’ll make in your life. Add in getting a mortgage… it’s exhausting to say the least. Now whilst interest rates and lender offers fluctuate, here is some information which might help narrow down what style of mortgage might be right for you:

30 Year Fixed Rate Mortgate. This tends to be the most popular loan choice, particularly if one plans to live in the home long term (10+) years. You’ll probably pay a higher interest rate but it removes the uncertainty of what your payments will be each month.

15 Year Fixed Rate Mortgage. If you can afford higher monthly payments this may be a good choice for you. You have the same security of a fixed loan rate but you can typically qualify for a lower interest rate and consequently pay less over the life of the loan.

Adjustable Rate Mortgage (ARM). An ARM means that throughout the life of your loan, the interest rate will adjust at a specified time and frequency. It often begins with a lower initial rate which then fluctuates with market trends. If you are planning to sell the property within a short time frame this might be a good option for you. And if interest rates fall then you can see some longer term advantage. But if interest rates rise, you could end up paying more over a longer term.

Interest Only Mortgage.  This can be a fixed or adjustable rate mortgage which allows you to pay only interest for a set period of time, after which it reverts to a traditional interest+principal loan. If you are anticipating financial changes this can be a good option as it allows a little more financial flexibility. However one should always plan accordingly and ensure they can afford what they have borrowed when the interest only period ends.

Balloon Payment Mortgage. A short term fixed rate loan option whereby you make traditional fixed loan payments for x number of years, then at the end of the term pay off the lump sum balance (called a balloon payment). Often used by buyers whose ownership goals are short term and who sell on or before the loan term ends.

Before you choose a loan make sure you consider the following:

*  How much can you afford to pay per month? Your lender will help you with this based on your income and current debt situation. Having less existing debt will allow you to maximize your borrowing capacity so try and pay down your credit cards and other loans first.

* Credit matters. The higher your credit score, the better the interest rate you will qualify for. So make sure in the lead up to applying for a loan your credit history is solid (at least a year of no missed payments for example)

* Know you limits before you shop and get pre-qualified. In a competitive market it is good to know what you can afford and if you do make an offer, it shows a seller that you are a serious buyer. It also means that you won’t spend time looking at properties above your price range, or at least you’ll know its just window shopping.

* What down payment can you pay and what down payment will work with the loan you would prefer? If you qualify for specialty loan programs such as the USDA home loan program, you may not require much of a down payment. Other loan terms may require a 10-20% deposit. And ultimately the bigger the down payment, the less you need to borrow and the less interest you’ll pay.

* Shop around and get recommendations for a lender or mortgage broker. Bank interest rates and loan terms vary considerably. Meet with at least 3 lenders and see what options are available to you.

And lastly, just because you qualify to borrow x amount doesn’t mean that you should. Buying a house is an emotional experience and it can be easy to get swept along by that – but always make sure you take into consideration your career plans, lifestyle, and future goals.