6 min read | 2020-10-12 | Homeowner Guide |
Covered Home Buying Guide - Finding the Right Mortgage
How to Choose the Right Mortgage for Your New Home
If you are new to home buying, you’ll soon learn that mortgage loans come with their own vocabulary, awash in an alphabet-soup of industry acronyms and obscure terms. Few things strike fear into the hearts of so many as the home buying process. Even if you’re a seasoned home buyer, we don’t buy homes every day. Life gets busy after the closing (and before) and most of what we learned about mortgages in the process is quickly lost to getting settled and then to sunny mornings overlooking our new home’s garden. Out of sight, out of mind.
In this part of our home buying guide, we’ll provide an outline on choosing the right mortgage for your new home, a refresher for some, and an introduction for others.
First Step: A Credit Checkup
It seems obvious, but your credit score drives your interest rate and eligibility for a mortgage. It makes sense to check on your score before securing a mortgage. Many times, by paying down a balance or two you can bring your credit score up enough to qualify for a better rate or a higher mortgage amount.
Over a 30 year mortgage, a rate of only 1 point higher can cost more than $50,000 in extra interest on a $250,000 mortgage.
Choosing the Right Kind of Mortgage
A mortgage is a long commitment of at least 15 years, and more commonly 30 years. Choosing the right kind of mortgage can make a huge difference in sustainability. Things change in life. Our employment and income can fluctuate in a variety of ways, for better or for worse. Surprise expenses come along and some new expenses become the new normal — expenses that weren’t in the budget when you were planning for your mortgage.
A longer repayment term, like 30 years as opposed to 15 years, can offer additional flexibility, and you always have the option of making extra payments toward the mortgage balance when you’re flush with cash, you lucky duck!
Types of Mortgages
Fixed Rate: This type of loan is the most common and the easiest to understand. You qualify for a rate and your rate doesn’t change throughout the length of the mortgage. This also means that your mortgage payment won’t change due to the loan. Taxes and insurance, however, can affect your mortgage payment as they change over time.
Adjustable Rate: An adjustable rate loan can be more affordable at the outset of the loan, which makes it attractive to some home buyers. The payment amounts for this type of mortgage can change over time, sometimes significantly, which makes can add an element of risk to the loan.
Conventional Mortgages: A conventional mortgage is not guaranteed or insured by the federal government but does conform to lending limits governed by Freddie Mac and Fannie Mae. Typically, a conventional mortgage is a speedier process than a government-insured loan and is reserved for credit scores of 620 and above.
Government-insured Mortgages: A mortgage guaranteed by the government usually requires more time to secure and sometimes requires that you belong to a qualifying group of borrowers.
FHA: Loans guaranteed by the Federal Housing Administration have lower down payment requirements than conventional mortgages but are often subject to Private Mortgage Insurance (PMI) until you have 20 percent equity in your home.
VA Loans: For Veterans, loans guaranteed by the U.S. Department of Veterans Affairs (VA) can be an attractive choice because interest rates are generally low and a VA loan does not require PMI.
USDA / RHS: Although debt-to-income requirements are strict, USDA loans are targeted at lower income home buyers in rural areas and some suburbs. With no down payment requirement on direct loans, these loans can help hopeful home buyers who may not qualify for a mortgage otherwise.
Conforming Mortgage: A conforming loan meets the underwriting guidelines of Fannie Mae or Freddie Mac in regard to the size of the loan. This amount changes most years and can vary for certain parts of the country.
Jumbo Mortgage: A jumbo loan typically requires a higher down payment and is, as its name suggests, a larger loan than a conforming loan.
Choosing the Right Mortgage Lender
Online/Digital Lenders: In the old days, you went to the bank to get a mortgage — and you still might do that, but you have more options now! Many lenders do business almost completely remotely now. You can sign releases and send documents to secure online lender portals. The only time you’ll see a live person with these online lenders is when you have your closing — and even that person doesn’t work directly for the lender. Expect to replace in-person visits with phone calls and emails. Quicken Loans is now the largest mortgage lender in the U.S., and they do it all with virtually no retail presence.
Credit Unions: Credit unions used to be difficult to join. In their modern iteration, joining a credit union is easier than ever. Unlike banks, which are often owned by investors, a credit union is owned by its members. Rates may be lower for some types of loans, but this isn’t a universal rule. A credit union provides you with one more option to shop the total loan package. At the very least, you’ll find another place to bank that may have fewer fees than your bank.
Banks: Both big and small banks probably have locations in or near your town. You don’t need to bank with them to make an inquiry on rates and loan details. If you find the right mortgage with a bank, you don’t necessarily need to change banks. Most banks will be happy to write your mortgage without requiring that you have an account, but there may be some extra discounts available if they can take your mortgage payment automatically from an in in-house checking account.
A preapproved loan gives you credibility as a buyer so you aren’t dismissed as a tire-kicker who may or may not have any money to buy a house. You’ll want a preapproval letter before getting serious about house shopping and before making any offers. Pre-approval can help guide your home search by setting a fact-based maximum budget and saves time by eliminating options outside of that budget.
Choosing the right mortgage is an individual experience depending on finances and individual qualifications. There might be several right mortgages, putting you in the driver’s seat, and there might be some that not right at all, particularly those that leave no room for the surprises that life often sends our way.
Most experts recommend caution because housing markets can still be volatile. The right mortgage, however, can help you buy the house of your dreams while staying within your means.
After you choose the right house and the right mortgage, reach out to our team of dedicated insurance advisors here at Covered before your closing to get the right home insurance policy as well. You’ll want to protect your newest investment — now and for decades to come.