If you feel helpless when it comes to shopping for a mortgage, you aren’t alone. Buying a mortgage isn’t like finding the cheapest gallon of gas in town. You can’t look at the sign on the mortgage storefront and make a determination. Instead of a simple quote, you are often presented with a complicated list of fees and charges and confusing interest rate options. It can be hard to see the forest for the trees when it comes to mortgage shopping. Keep this advice in mind when going through this confusing process.
Buy on Price—Never on Payment!
Decisions based solely on the monthly payment are the single largest contributors to mortgage trouble. In order to avoid problems, you must understand price so that you have a grasp on the total cost of acquiring new mortgage debt. The mortgage industry positions its products in a way that narrows your focus down to the payment. This benefits the mortgage company and misdirects your attention from more important things, like the total cost associated with your loan and other details that can cost you dearly down the road. The importance of removing the focus from the payment cannot be overstated.
Manage Your Mortgage by Keeping the End in Mind
Your mindset concerning homeownership and mortgage debt will drive your choices. This also has a dramatic impact on how your finances look over time. Your goal is to be mortgage free eventually. Always keep this goal in mind.
Do you daydream about moving up, or are you looking to live in a home that is adequate for your needs? Are you tempted to buy more than you really can afford, or are you trying to minimize the cost and size of your mortgage debt?
If your attitude is to chase a bigger, more luxurious home than you really need, you are in for big trouble. It doesn’t take a brain surgeon to determine which approach contained in the questions above makes more sense. One borrows against the future, with no concern for the long-term costs of carrying mortgage debt into the retirement years. The other looks to the future, planning for a day when there are no debts to service.
Understand What You are Buying
Before you decide on price, you must examine the loan—because price tends to appear lower on mortgage products that present the greatest risk to the home owner.
Understanding your mortgage loan means that you are understand the terms of the mortgage note. These terms dictate the payment, the maturity (or payoff) date, and, if you have an adjustable-rate mortgage, the manner and timing in which the payment is subject to change.
A fixed-rate mortgage carries an interest rate that remains the same for the entire term of the mortgage; it is generally offered for fifteen, twenty-, twenty-five-, thirty-, and forty-year loan terms. The shorter the term of the fixed-rate mortgage, the better the price will be and the larger the payment will become.
Adjustable-Rate Mortgages (ARMs)
An adjustable-rate mortgage carries an interest rate that changes over the life of the loan, at predetermined intervals based upon a rate index. The initial mortgage payment, and all subsequent changes to the mortgage payment, are calculated based upon the payment necessary to pay the loan in full from the date of the interest-rate change to the maturity date of the mortgage.
The most common type of adjustable-rate mortgage used by consumers in recent years is the hybrid adjustable-rate mortgage. These loans carry a fixed rate for an introductory period and are adjustable thereafter. The most common introductory periods are for one, three, or five years, but seven and ten years are also used.
If this is your first time buying a home, the process of shopping for a mortgage can be overwhelming. Don’t let the allure of your “dream home” cloud your vision. Only buy what you can afford and make sure you understand the terms of your loan.