Good tips to save when shopping for your next home loan

By admin On February 15, 2010 Under home loans

How do I decide on the right mortgage for myself? Find out some of the factors that you need to consider before choosing a mortgage:

1. The Mortgage Type: There are basically two types of mortgages: one carrying a fixed rate and the other with an adjustable rate of interest. The fixed rate mortgage has less risk because you have to pay the same amount every month, but the interest rate is slightly higher than what is offered initially by the adjustable rate mortgage. Adjustable rate mortgages (ARMs) have a lower interest rate initially but the rates can change with market fluctuations. You can also get a combination of the two types, where you can get a fixed rate for three years or so, after which it is converted into Adjustable Rate Mortgage.

2. The principal amount: The mortgage principal is the money that you would be borrowing so that you can buy the house. So, it is the price towards the home minus the downpayment. The principal amount is decided based on your credit score and the income.

3. The interest rate: Though most people like to go for mortgage with a low interest rate, it should not be the ultimate deciding factor. A loan that has a low rate of interest but high closing costs will be more expensive. Factor in the Annual Percentage Rate to decide which takes into account the interest rate and other loan costs.

4. The term: Mortgages that are for a short-term may have high monthly payments but you end up paying less on a long-term basis because you save money on interest payments.

5. Monthly payment: Make sure you buy a home that has affordable monthly payment options. There is a tendency of people to go for loans with the lowest payments on a monthly basis like say, interest-only mortgage. But the flip side is they do nothing to minimize the principal amount and you will see after a period of time, that you still owe as much you did when you took the loan in the first place. So make sure that you take the right mortgage that is affordable over a long-term period.

6. Discount Points: Lenders offer ‘discount points’ that help lower the interest rate of your mortgage. 1 point is as good as 1 percent of the principal amount, so if you are taking a $100,000 loan, one point will be of $1000 value. For every point you buy, you reduce your rate by 0.25 percent. You should make use of these discount points if you want to stay in the house for long.

7. Closing Costs: Mortgage lenders charge a lot of fees as a part of closing mortgage deals which result in a huge amount as addition to your borrowing costs. These closing costs depend on the area that you want to lie and the reputation of the lender. So the best thing to do is check with your lender in advance for an estimate of closing costs. If you do not comprehend any charge, ask them to explain you clearly.

An assessment of the above seven factors will help you get a good mortgage deal.

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