Selecting a mortgage loan may be the most important financial decision you will make – a decision you will live with for years to come. In order to make the best decision possible, do some research before you apply for a loan, and then choose carefully from the many options available.

 

Before you begin shopping for a loan, order your credit reports from all three credit reporting agencies – Equifax, Experian and Trans Union – and check them for errors. As many as half of all credit reports may contain serious errors that could cost a borrower thousands of dollars in interest, or even cause a denial of a loan.

 

Also, take a look at interest rate movements before you apply. Mortgage rates change frequently and rarely remain steady for any length of time. By monitoring the trends in mortgage rates, you have a much greater understanding of what would be a fair mortgage rate for you.

 

Next, review your financial situation to help determine the best type of mortgage for you. While doing so, ask yourself these questions:

• How long do I plan to stay in the house or with the loan?
• How high of a monthly payment can I afford?
• How much money do I have for a down payment?
• Will I be able to pay off the mortgage early?
• Can I make extra principal payments?
• Will my income remain stable or increase in the coming years?

Your answers to these questions will help lead you to the mortgage choice that’s best for you. There are three basic types of loans available, each of which has its benefits and drawbacks.

• Fixed Rate Loans are loans that lock in the current market interest rate. A fixed 30-year loan will charge more interest over the life of the loan than a 15-year loan, but it will have lower monthly payments. A fixed rate loan maybe your best choice if you plan to own the property for a long period of time. There will be very little fluctuation in your mortgage payments.
• ARM Loans are adjustable rate mortgages in which the interest rate begins at a low rate and can change after a specified period of time. This loan is a good option if you are reasonably sure you will be selling the property in a few years or if your income will increase.
• Balloon Loans are short-term mortgages (usually 5 to 7 years) that provide a level monthly payment, but are not fully paid off over the original term. At the end of the term a principal balance will remain, and the lender usually requires that it be paid in full. The balance can be refinanced if the borrower is not ready to sell the property, but the borrower may incur closing costs again.

There are also other factors you need to consider, such as points, settlement costs, taxes and other fees, to determine which type of loan best fits your financial situation.

• A “point” is a fee that equals one percent of the loan amount. You will usually pay fewer points in exchange for a higher interest rate, or more points for a lower rate.
• Mortgage Insurance protects the lender against default and allows the lender to make a loan that may be considered a higher risk. Lenders often require mortgage insurance if the down payment is less than 20% of the sales price.
• Flood Insurance is required if your home is in a flood hazard area. Your lender may charge you a fee to check the flood zone of your property.
• Part of your monthly payment may be deposited into an Escrow Account so your lender can pay your real estate taxes, property insurance, mortgage insurance or other expenses. Ask your lender if you will be required to set up an escrow account. This will ensure level payments for these expenses, rather than any annual lump sum payments.
• Your lender may charge other settlement costs and fees, including appraisal fees, title insurance, fees for a survey, or fees for obtaining your credit report.

You may be eligible for a loan insured through the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs or other programs operated by cities or states. These programs usually require a smaller down payment than other mortgages. Ask lenders about these programs, or get more information directly from the agencies.

 

After you have determined the type of mortgage that will work best for you, it’s time to begin contacting potential lenders. Ideally, you should find a lender and become pre-qualified for a mortgage before you begin looking for a home. By doing this, you will know the price range you can afford. Sellers and real estate agents will also appreciate your pre-qualified status, and will view you as a serious home-buying candidate.

 

When you have found a loan and a lender that is best for your situation, be sure to “lock in” your interest rate and/or points when you apply. This will keep the rate and points from changing until settlement or closing. Ask your lender if there is a fee to lock in the rate and whether the fee reduces the amount you have to pay for points. Also, be sure to ask whether the lock-in fee is refundable if your application is denied.

 

The final thing to keep in mind as you establish a relationship with a lender is that the lender serves you, not the other way around. If you feel pressured or bullied into a deal that isn’t to your advantage, try another lender.