Buying a new home is an exciting and wonderful time. But once the process starts, future homeowners quickly find out that a lot of hard work and planning must come first before the highly anticipated move-in date: saving for the down payment, the exhausting process of finding the perfect home, and obtaining the best mortgage to fit your financial situation. Unfortunately, in the rush to move into their perfect new home, some future homeowners neglect to investigate the best options for a mortgage and instead take the first one that comes along. A mortgage, however, is a long-term commitment and should be entered into carefully. Otherwise, a homeowner could end up with the wrong loan and potential financial problems. Here are five things to consider before choosing a mortgage.
Obtain a Copy of Your Current Credit Report
A credit score is a rating system based on an individual’s credit history that indicates the person’s creditworthiness. Your current credit report will let you know where you financially stand so you can demand the bests terms for your new loan. Typically a good credit score is above 680; a score of less than 600 indicates a riskier borrower. People with higher scores usually are granted better interest rates and terms.
Consider Both the Interest Rate and Annual Percentage Rate When Choosing a Mortgage
Both the interest rate and annual percentage rate (APR) are expressed as percentages and are important numbers to evaluate when choosing a mortgage. The interest rate is the cost of borrowing the principal loan amount, or the total sum of money borrowed. The APR includes the interest rate, and other costs such as broker fees, discount points, and some closing costs. The interest rate calculates what your actual monthly payment will be, and the APR calculates the total cost of the loan. Consider both these rates when choosing a mortgage.
Compare Down Payment Requirements Between Lenders
A down payment is almost always required when obtaining a mortgage, and conventional loans require twenty percent down. However, many lenders offer insured mortgages with as little as five percent down payment; but this low down payment comes at a price. In Canada, mortgage default insurance is required for down payments between 5% and 19.99%. The cost of the insurance is a one-time charge and may be paid at the time of closing or added to your mortgage balance. And as of February, 2016 new federal rules mandate that home buyers in Canada will need larger down payments for properties over $500,000.
Compare all Closing Costs Before Choosing a Mortgage
Closing costs are one-time fees lenders charge for a variety of administrative expenses. Typically closings costs represent about 3 to 4 percent of your home’s total sale price. Many of these fees are arbitrary and should be compared between lenders before choosing a mortgage.
- Points, which will reduce your interest rate
- Loan application fees
- Loan processing fees
- Credit report fee
- Appraisal fees for your home and title insurance and points.
- Title search
- Title Insurance
- Escrow fee
- Prepayment penalty if you pay loan off early
- Possibly more
Obtain a Good Faith Estimate from the Lenders
A good faith estimate is a document that lists of all the fees and other costs associated with a home mortgage. The good faith estimate is an estimate of expenses; the actual expenses or the closing costs may be different. Nevertheless, it is an essential document to have in hand when choosing a mortgage.
Choosing a mortgage is one of the most important financial decisions that you will make in your lifetime, and the right mortgage might save you tens of thousands of dollars in wealth over the lifetime of the loan.