Unless you’re among the lucky few who can pay cash for a new home, you’re going to need a mortgage. Convincing a bank to loan you hundreds of thousands of dollars can be the most intimidating and daunting part of the home-buying process. But no worries — I’m here to help you get through this very important step. Here are a few questions to think about before giving me a call:
Would it be better for you to work with a bank or a broker?
Most home buyers get a mortgage a directly from the bank where they keep their primary savings. But that’s not necessarily the only — or the best — option. You may be able to find a lower interest rate by shopping around for different lenders. Or you can choose to hire a mortgage broker to do the shopping for you.
Brokers work directly with lenders to negotiate terms and determine what the best loan would be for you based on your income, savings, and any special circumstances and/or needs that you may have. For example, if you just landed a job where you’ll be making considerably more than in previous years, or you received a big raise at your current place of employment, you may have ended the year with more buying power than what‘s reflected in the last two years of your tax documents — which a broker might be able to use in mortgage negotiations.
Keep in mind that brokers charge a fee — typically about 1% to 2% of the cost of your loan. Although many brokers receive this fee from the lender, they might charge you a fee as well. However, this would be money well spent if you don’t have the time to do your own research or your financial situation is complex.
What type of mortgage would work best for you?
The two main types of mortgage loans are fixed-rate mortgages and adjustable-rate mortgages (ARMs). The interest rate on a fixed-rate mortgage remains the same for the life of the loan, whereas an ARM has an interest rate that is fixed for an initial period (e.g., five years), and then adjusts at regular intervals (typically one year) to reflect market indexes (meaning your payments will fluctuate as well).
If you plan to stay in your new home for longer than 10 years and you would prefer predictable monthly mortgage payments during that time period, a fixed-rate mortgage may be a better option for you. However, if you’re looking for a lower interest rate right from the start, you might consider an ARM, which can be a percentage point (or more) lower than a fixed-rate mortgage and may not start fluctuating for 10 years or more — which can add up to substantial savings.
How long do you want the loan period to be?
The two most common mortgage loan periods are 15 years and 30 years. A 15-year loan offers a lower interest rate but higher monthly payments; whereas a 30-year loan offers lower monthly payments, but you’ll pay more interest over that time period.
Here’s an example of that comparison using current interest rates:
- If you borrow $200,000 on a 30-year fixed-rate loan at 4.16%, your monthly mortgage payments (principal & interest) would be about $978, and you’d pay a total of about $152,000 in interest over the life of the loan.
- On the other hand, if you borrow the same $200,000 on a 15-year fixed-rate loan at 3.35%, your monthly payments (principal & interest) would be about $1,416, and you’d pay about $55,000 in interest over the life of the loan.
So it basically comes down to this: Do you want to pay more now or later?
Use this handy tool to figure out what would work best for you based on your current financial circumstances:
Mark R. Kailer
©2019 Mark Kailer Realty