Shopping for a mortgage is a bit like stepping into an ice cream parlor with chocolate chip on your mind only to be confronted with a chalk board display of exotic flavors hitting you in the face! Suddenly you have to make a decision that isn't so easy. You agonize and indecision sets in. Same goes in choosing a mortgage. How do you decide which one you want? Try starting with these parameters:
The Big 4: Rate, Term, Points, Closing Costs
Rate: There are actually two to consider: The rate that is used to calculate your monthly payment- this is the rate that you see advertised- and the annual percentage rate (APR) which is the total interest rate you will actually pay. This rate includes both the interest rate involved in calculating your monthly payment, and the interest paid as points at the origination of the loan.
Term: The length of the mortgage, or the number of years the mortgage will run, the term, is usually 15 or 30 years. The length of the term will greatly affect your monthly cost - shorter terms = higher monthly costs.
Points: The amount of money you will need to pay the bank for a particular rate on a loan. It is the interest you are paying upfront to get a lower interest over the life of your loan. Some Buyers prefer not to pay points and work with a higher rate, ask your banker to do the calculations for you and make the comparison.
Closing Costs: The amount of money you will need to pay for the services involved in processing the loan varies from bank to bank. Be sure to ask for your estimate before committing .
The Chalkboard Choices:
Adjustable Rate vs. Fixed Rate,
A clash of the titans to be sure. Which one is right for you? That depends...if you are planning to hold on to your property for a long time (10+years) and the rates are low, opt fo
r the fixed. If you may be selling in the near future (within 3 - 5 years) or the fixed rates are prohibitively high, you may opt for the adjustable. Just remember that the adjustable rate is likely to increase! Be sure you understand the extent to which it can increase and how often that may happen. An affordable adjustable rate now may not be affordable several years from now
Local Lender vs. Large Bank vs. Credit Union. Any one of these is a viable option. Do your homework to be sure that the lender you are choosing is a legitimate mortgage company. In this current economic climate it may behoove you to check with your local lender or credit union first.This may prove to be a smart move if you're considering Cambridge Real Estate, Somerville Condos or an Medford home, for example. Either way, be sure to shop around for your best package.
Teaser rates.
Much like the car dealer who advertises that one stripped down vehicle on the lot for $8,000 just to get you in the door, banks will publish their best possible rates in order to attract your business. These rates apply to borrowers who are very well qualified with good credit and good employment history, and to loan amounts that meet the Fannie Mae guidelines and fall below "jumbo" loan status - for single family homes, $417,000, for a two family dwelling, $533,000, for a three family $645,000. Any loan higher than these amounts pays a higher "jumbo" rate.
FHA Financing
If you're a first time buyer and have limited funds for a down payment, an FHA - insured loan might be right for you. FHA insured loans have lower interest rates because the federal government insures the loan for lenders. The Federal Housing Administration site is constructed to answer all your questions about this type of loan.
A lot to consider for sure, but take your time deciding which mortgage "flavor" is right for you and once you decide you're ready to begin your home search . Step 2 done and on to step 3.
Additional Resources:
Freddie Mac: Fixed or Adjustable?, visit Freddie.com
Questions about an FHA-insured Loan?, visit Federal Housing Administration
A Consumer's Guide to Settlement Costs: Federal Reserve
Fannie Mae: Loan Amounts