Brought to you by: The Consumer Financial Protection Bureau Home Loan Toolkit
One of the first ways to make better choices on the path to owning a home is the get the best mortgage for your situation. To make the most of your mortgage, Consumer Financial Protection Bureau (CFPB) lists out 7 steps to take when deciding what mortgage works for you:
- Define what affordable means to you
It’s up to you to decide what your most comfortable paying monthly for your future home. Lenders can only calculate how much you are able to pay for a mortgage, but they won’t be able to calculate how much you feel comfortable paying. In order to find out what you feel comfortable and confident paying, follow these steps:
STEP 1: Estimate your total monthly home payment.
STEP 2: Estimate the percentage of your income spent on your monthly home payment.
STEP 3: Estimate what is left after subtracting your monthly debts.
STEP 4: Decide if those numbers are right for you.
- Understand your credit
Your credit and credit scores impact your mortgage interest rate and fees a significant amount. About 35% of your credit scores are based on whether or not you pay your bills on time. About 30% of your credit scores are based on how much debt you owe. If your credit score is below 700, you will likely pay more for your mortgage. This information will help you decide if you should wait until you improve your credit before buying a home.
- Pick the mortgage type—fixed or adjustable—that works for you
With a fixed-rate mortgage, your principal and interest payment stays the same for as long as you have your loan. This will give you a predictable payment. With an adjustable-rate mortgage (ARM), your payment often starts out lower than with a fixed-rate loan, but your rate and payment could increase quickly. It is important to understand the trade-offs if you decide on an ARM.
- Choose the right down payment for you
A down payment is the amount you pay toward the home yourself and then the rest is borrowed though your mortgage loan. A 20% or higher down payment likely provides the best rates and most options. Low down payment programs are typically more expensive because they may require mortgage insurance or a higher interest rate. To calculate your down payment, look closely at your total fees, interest rate, and monthly payments.
- Understand the trade-off between points and interest rate
Points are a percentage of a loan amount. Lenders offer different interest rates on loans with different points. There are three main choices you can make about points.
– Don’t pay or receive points at all (zero point loan).
– Pay points at closing to receive a lower interest rate.
– Have points paid to you (lender credits) and use them to cover some of your closing costs.
- Shop with several lenders
Once you know how much you are comfortable paying for a mortgage and down payment and you’ve reviewed your credit, it’s time to start loan shopping. Comparing at least three offers in writing could save you thousands of dollars over the life of your mortgage.
- Choose your mortgage
After all of your research, it’s time to choose a mortgage. Here is a checklist to confirm that you picked the best option for you:
– I can repay this loan.
– I am comfortable with my monthly payment.
– I shopped enough to know this is a good deal for me.
– There are no risky features such as a balloon payment or prepayment penalty I can’t handle down the road.
– I know whether my principal and interest payment will increase in the future.