Buying a house is fun and exciting, but it’s also pretty scary. One of the biggest reasons why new home buyers worry is due to the complications and lack of knowledge they have about the process. Getting a mortgage doesn’t have to be complicated, and the more you are informed about what you need to know, the better you will do and the less you have to stress about. So let’s look at four things you should consider when you are getting a mortgage.
1) Type of Mortgage
There are two basic types of mortgages you will likely be looking at – ARM or fixed. An adjustable rate mortgage, or ARM, has a fixed interest rate for a certain period of time, but then adjusts, often rising. A fixed rate, on the other hand, is set when you get the mortgage, and stays that same rate, unless you refinance or otherwise pay off the mortgage. So which one is right for you?
An ARM can be good if you are planning on selling within a short period of time (a matter of years), while a fixed is often better if your future plans are more long-term, or uncertain. Talk to your financial professional to see what’s right for you, but with interest rates today being the lowest they have ever been in the United States, locking in the low rates with a fixed mortgage is probably your best bet.
2) Term Length
This is how long you will have to pay off your mortgage. The 30-year mortgage has long been standard, but you can get other mortgage lengths as well. The 15-year and 20-year mortgages are not uncommon, and even the 5 year mortgage exists. It all depends on how aggressively you want to pay off your mortgage and how much income you have to support the payments. You will pay much less interest on a 15-year mortgage instead of a 30-year mortgage, but your payments will be higher. You need to decide what you can afford for your mortgage payments to help you determine what mortgage term length is best for you.
3) Shop around
Many individuals will shop around when looking for a deal on the latest gadget you want to buy, or go to a different grocery store because they’re having a sale on a certain item, but don’t bother to shop around for their mortgage. The difference in interest rates or closing costs could save you thousands of dollars. Shop around to make sure you’re getting the best rate available.
4) Buying Points
You can often “buy points” at closing, meaning you pay higher upfront costs in order to get a lower interest rate and lower monthly payments, which will save you money down the line. Talk to your mortgage broker to determine what it will cost you to buy down your rate, and the “break even” term, or how long you will have to hold the mortgage for you to make back the money you spent buying the rate down. If you have the money available and are planning to hold onto the place for a long time, buying points could save you quite a bit.
These four things are all crucial considerations if you’re looking at getting a mortgage. If you take a little time at the outset to familiarize yourself with the ins and outs of getting mortgages, you will save money and make better choices for you and your family.
Photo credit: For sale by Diana Parkhouse/flickr
Lara Nelson serves as a contributor for a mortgage protection site. Mortgage protection plans are increasingly popular due to the uncertainty of the economy. Finding a guide to MPPI is a good way to protect your investment.