Finding the right mortgage is an involved process that can cost a person or couple thousands of dollars over the life of the loan. The key to figuring out which loan is the right is to carefully compare all of the offers that you receive. When looking through your loan paperwork, make sure you check out these items.
Interest rates. This is probably the most obvious thing that people think of when comparing loan offers, but you would be surprised at how few people really think about this. Most mortgages allow borrowers the option of reducing their interest rate by paying more money upfront at closing. This is called paying points, and it can make sense to pay for them if you plan on holding the loan for a long time. If you plan on refinancing, however, there are many more important factors to consider.
Payment terms. Decades ago, nearly every mortgage lasted for fifteen years and allowed a person to pay it off early without a penalty. Today, there are literally thousands of payment options available. Adjustable rate loans have interest rates that can fluctuate according to the bank’s whims. This means that in times of low interest rates, a borrower could save a lot of money, but as soon as interest rates rise it is possible for a person to pay so much that they could no longer afford the payments.
In addition, it is possible to get practically any payment period that a person wants. Payment periods can range from as little as one year to fifty years. In addition, borrowers today can choose to make their payments as often as once a week or as seldom as once a year. Of course, asking for payment terms that deviate beyond the standard once a month payment can result in higher closing costs or a higher interest rate. Think about whether an alternative payment plan is worth these extra fees.
Finally, it is important to pay attention to whether or not the loan has a balloon payment at the end. Today it is possible to get a loan in which the principal is not fully paid off by the end of the payment term. This means that the borrower must pay it off at the end. That means the borrower must sell the house to pay off the loan, refinance, or save up the balance.
Closing costs. Mortgages are famous for their high fees, but there is a large difference in the amount of fees that banks charge on similar loans. Ask for an estimate of the closing costs on each of the loans you consider. Keep in mind that a company that charges a lot more in fees might be worth it if the loan comes with a lower interest rate. In the same way, it can also make sense to pay as little as possible upfront but accept a higher interest rate, especially if you plan on refinancing the loan.