Mortgage research is an important part of the overall buying process. But where is the information, and what should you look for? This article hopes to guide you in the right direction.
An informed decision is a better decision.
Whether it’s buying a car, selecting healthy foods, or choosing an interior paint color, a little research can guide you to the right decision.
The same goes for mortgages. Mortgage research should be an important part of your overall process. In fact, it should probably be the very first step you take towards your home purchase. With proper research, you can select the right mortgage for your needs, choose the best terms, and land an affordable mortgage that fits your budget.
Mortgage Research: Where to Start, How to Get it Going
Understand Your Budget
This is less about mortgages, and more about your personal finances. But it’s an essential first step towards researching mortgages and finding the loan that will fit your needs. Set aside a half hour, sit down with a calculator and financial records, and determine what type of monthly payment you can comfortably afford. The first step in this process is to determine exactly how much you make on a monthly basis. You should also consider factors like current debt payments and living expenses. Regardless of expenses, most financial resources recommend that a mortgage payment should be roughly 20% to 30% of you monthly income. Of course, if you have significant consumer debt, student loans, and car payments, this number may need to be lowered.
Research the Different Types
There are a variety of mortgage types, and each one is designed to fit a different purpose. FHA loans, for example, are designed for people with moderate to low incomes, helping people who may struggle with downpayment or qualification. A jumbo loan, on the other hand, is for people with high incomes who want to purchase properties ranging into the millions of dollars.
Other loan types include:
- VA Loans: A financing options for qualifying active-service members and veterans. Although fees and closing costs apply, this options offers zero-down financing in some situations.
- USDA Loans: Another zero-down option, these government-supported loans encourage homeownership in suburban and rural locations.
- Conventional Loan: Any loan that adheres to the guidelines set by Fannie Mae and Freddie Mac.
These are just a few of the loan types. You don’t have to be an expert on each one, but a basic understanding of the most common loan types will help you make the right decision.
Research How Terms Impact Your Payments and Total Price
There are many different variables that can be changed in a loan, and you should understand how these variables can impact your monthly costs as well as your total price. Variables include interest rate, downpayment, and the length of the loan.
Take the loan length, which can significantly impact your finances, as an example. Using our mortgage calculator, let’s assume you are purchasing a home for $500,000 with a $50,000 (10%) downpayment. At 4.00% interest, a 30-year fixed-rate mortgage would have principle and interest payments (P&I) of $2,148. But if we shifted the loan to a 15-year mortgage, the monthly payment would be $3,329. That’s a sharp increase to your monthly expenses!
Of course, a 15-year mortgage also has it’s advantages. Although the payment is almost $1,200 more a month, the mortgage will be paid off in half the time, and the total cost would be $599,220. ($3,329 x 180 months = $599,220) After making the smaller payments for twice as long, the total cost for a 30-year loan in this scenario would be $773,280. ($2,148 x 380 = $773,280)
Mortgage calculators, while not an official offer for financing terms or payments, can be extremely beneficial. They can help you understand, in a general sense, how much you can expect to pay given your total potential loan, your downpayment, interest rate, and other factors.
Possibly the most useful factor for downpayments is the chance to see how a downpayment can impact your total price. For example, if you are purchasing a $400,000 home, you can run the mortgage through scenarios with downpayments of $20,000 (5%),$40,000 (10%), or $80,000 (20%). This helps you see just how much a downpayment will impact your monthly expenses. It can also help you compare 15-year mortgages to 30-year mortgages, or see how interest rates will impact your costs.
There is no commitment, so it never hurts to play with mortgage calculators to better understand the financing variables and how they impact your budget.
Know the Important Mortgage Terms
There is a lot of jargon in the mortgage industry. With terms like DTI, LTV, fixed-rate, APR, t’s possible that this is one of the most jargon-saturated industries in the country. Because of this, many people feel uninformed or even intimidated by the mortgage process. But these terms are actually simple, and as a borrower, there are only a few that are really important to you.
DTI, for example, is a term that all borrowers should understand. Standing for “debt-to-income,” this is a comparison of your total debt load to your total income. Usually expressed monthly, this is an important factor in lending decisions.
The loan-to-value ratio is also important. This is simply a statement of the total loan compared to the value of the property being purchases. So if you need a loan of $600,000 to complete the purchase of a property valued at $800,000, the “LTV” would be 75%.
By sticking to the most important terms, you can become for comfortable and confident with various mortgages.
Talk with Someone You Trust
Above all, it’s best to talk with someone you trust, someone who has taken out a mortgage in the past and can provide clear advice on financing, budgets, and the details of mortgages. It can be a parent, grandparent, or trusted friend, but seeking advice from someone who will guide you in the right direction can be endlessly helpful.
Guiding You to An Affordable Mortgage
We are dedicated to outstanding service and support for mortgages in San Diego, the surrounding area, all of California, and many other states across the country. Contact our team today and we’ll help you choose the perfect mortgage for your next home purchase!
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