There’s a lot to know about choosing a mortgage, and there are a lot of resources out there to help you. Here’s our best advice to get you started.
Basic finance is always the place to start. If you don’t know exactly where all of your money is going, now is the time to sit down and figure it out. You can’t make a sound decision about a house and mortgage if you don’t have a clear budget and know exactly how much you can afford in a monthly payment.
This may be easier said than done, considering how complicated mortgages can be. You should be in good shape if you follow the rule that your housing payment shouldn’t be more than about 30% of your gross monthly income. And remember when you’re working out your new budget, to factor in other costs of homeownership, including property taxes, home insurance, maintenance costs, renovations or repairs, and increased utility costs.
Did you know there are dishonest lenders out there who will advertise a “low fixed rate” but actually mean that your rate stays “fixed” at that low number until the adjustable rate kicks in? Never trust an advertisement to tell you the whole story. If something has a fixed rate, make sure you ask how long it stays that way.
You don’t want any surprises when it comes to your mortgage. And if a bank is hiding surprises in the fine print, you can bet they’re the kind of surprises you aren’t going to like. Your mortgage is literally defining your relationship with your lender, stating what they can and can’t do and what you can and can’t do. Don’t let a lender get away with more power than you’re willing to give.
If you have an attorney you trust, have them go over it too to catch things you might miss and to make sure you’re clear on the legal ramifications of the agreement.
A good mortgage broker is also a great idea. You’ll have someone who really knows the ins and outs of fine print and can get the best outcome for you. A good broker can also help you go through your credit report to see what you can do to improve your score and get a better loan or even help you qualify for one when you didn’t before.
Consider an adjustable rate mortgage (ARM) only if you’re sure you can benefit from it long-term. Gambling on something as big as a home mortgage is simply a bad idea. But if it’s your “starter house” and you don’t intent to stay long, if you will very likely move again before the initial rates expire, or if you have enough wealth to make the tax breaks worth the interest rates, then an ARM is worth looking into.